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CASH AND RECEIVABLES
21. Which of the following is not considered cash for financial reporting purposes? a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s Which of the following is considered cash? a. Certificates of deposit (CDs) b. Money market checking accounts c. Money market savings certificates d. Postdated checks Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these. Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and a. is acceptable as a means to pay current liabilities. b. has a current market value that is greater than its original cost c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation. d. is so near its maturity that it presents insignificant risk of changes in interest rates.
Test Bank for Intermediate Accounting, Twelfth Edition Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability. Deposits held as compensating balances a. usually do not earn interest. b. if legally restricted and held against short-term credit may be included as cash. c. if legally restricted and held against long-term credit may be included among current assets. d. none of these. The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. none of these. Which of the following should be recorded in Accounts Receivable? a. Receivables from officers b. Receivables from subsidiaries c. Dividends receivable d. None of these What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a. As offsets to capital. b. By means of footnotes only. c. As assets but separately from other receivables. d. As trade notes and accounts receivable if they otherwise qualify as current assets. When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount. Trade discounts are a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues. c. used to quote different prices for different quantities purchased. d. all of the above. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement. c. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
Cash and Receivables
d. sales discounts forfeited in the cost of goods sold section of the income statement. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because a. most short-term receivables are not interest-bearing. b. the allowance for uncollectible accounts includes a discount element. c. the amount of the discount is not material. d. most receivables can be sold to a bank or factor. Which of the following methods of determining bad debt expense does not properly match expense and revenue? a. Charging bad debts with a percentage of sales under the allowance method. b. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. c. Charging bad debts with an amount derived from aging accounts receivable under the allowance method. d. Charging bad debts as accounts are written off as uncollectible. Which of the following methods of determining annual bad debt expense best achieves the matching concept? a. Percentage of sales b. Percentage of ending accounts receivable c. Percentage of average accounts receivable d. Direct write-off Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? a. A percentage of sales adjusted for the balance in the allowance b. A percentage of sales not adjusted for the balance in the allowance c. A percentage of accounts receivable not adjusted for the balance in the allowance d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach a. gives a reasonably correct statement of receivables in the balance sheet. b. best relates bad debt expense to the period of sale. c. is the only generally accepted method for valuing accounts receivable. d. makes estimates of uncollectible accounts unnecessary. At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006. What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively? a. Overstate, overstate, understate, zero b. Overstate, understate, understate, understate c. Overstate, overstate, overstate, overstate d. None of these
Test Bank for Intermediate Accounting, Twelfth Edition Which of the following is true when accounts receivable are factored without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables. Which of the following statements is incorrect regarding the classification of accounts and notes receivable? a. Segregation of the different types of receivables is required if they are material. b. Disclose any loss contingencies that exist on the receivables. c. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. d. Valuation accounts should be appropriately offset against the proper receivable accounts. Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale? a. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. b. The transferor surrenders control of the future economic benefits of the receivables. c. The transferee cannot require the transferor to repurchase the receivables. d. The transferor's obligation under the recourse provisions can be reasonably estimated. The accounts receivable turnover ratio measures the a. number of times the average balance of accounts receivable is collected during the period. b. percentage of accounts receivable turned over to a collection agency during the period. c. percentage of accounts receivable arising during certain seasons. d. number of times the average balance of inventory is sold during the period. The accounts receivable turnover ratio is computed by dividing a. gross sales by ending net receivables. b. gross sales by average net receivables. c. net sales by ending net receivables. d. net sales by average net receivables. Which of the following is not true? a. The imprest petty cash system in effect adheres to the rule of disbursement by check. b. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end. c. The Petty Cash account is debited when the fund is replenished. d. All of these are not true.
Cash and Receivables
A Cash Over and Short account a. is not generally accepted. b. is debited when the petty cash fund proves out over. c. is debited when the petty cash fund proves out short. d. is a contra account to Cash. The journal entries for a bank reconciliation a. are taken from the "balance per bank" section only. b. may include a debit to Office Expense for bank service charges. c. may include a credit to Accounts Receivable for an NSF check. d. may include a debit to Accounts Payable for an NSF check. When preparing a bank reconciliation, bank credits are a. added to the bank statement balance. b. deducted from the bank statement balance. c. added to the balance per books. d. deducted from the balance per books.
Multiple Choice Answers—Conceptual
Item Ans. Item
21. 22. 23. P 24.
d b d d
25. 26. 27. 28.
d d d d
29. 30. S 31. P 32.
d c d d
33. 34. 35. 36.
a c d a
37. 38. 39. 40.
b a d c
41. 42. P 43. 44.
c a a d
*45. *46. *47. *48.
c c b c
Solutions to those Multiple Choice questions for which the answer is “none of these.” 23. As receivables. 27. Many answers are possible. 28. Open accounts resulting from short-term extensions of credit to customers. 29. Open accounts resulting from short-term extensions of credit to customers. 39. Overstate, understate, understate, zero.
49. On January 1, 2007, Mann Company borrows $2,000,000 from National Bank at 11% annual interest. In addition, Mann is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Mann pays on its $2,000,000 loan is a. 10.0%. b. 11.0%. c. 11.5%. d. 11.6%. Hamilton Company has cash in bank of $10,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000. Hamilton should report cash of a. $9,000. b. $10,000. c. $12,000. d. $13,000.
Test Bank for Intermediate Accounting, Twelfth Edition Horvath Company has the following items at year-end: Cash in bank Petty cash Short-term paper with maturity of 2 months Postdated checks Horvath should report cash and cash equivalents of a. $20,000. b. $20,300. c. $25,800. d. $27,200. $20,000 300 5,500 1,400
Marshell Company has cash in bank of $15,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. Marshell should report cash of a. $13,000. b. $15,000. c. $18,000. d. $19,000. Peterson Company has the following items at year-end: Cash in bank Petty cash Short-term paper with maturity of 2 months Postdated checks Peterson should report cash and cash equivalents of a. $30,000. b. $30,500. c. $38,700. d. $40,800. $30,000 500 8,200 2,100
If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)? a. 1% b. 12% c. 18% d. 30% At the close of its first year of operations, December 31, 2007, Linn Company had accounts receivable of $540,000, after deducting the related allowance for doubtful accounts. During 2007, the company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000. What should the company report on its balance sheet at December 31, 2007, as accounts receivable before the allowance for doubtful accounts? a. $670,000 b. $590,000 c. $490,000 d. $440,000
Cash and Receivables
Before year-end adjusting entries, Bass Company's account balances at December 31, 2007, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is a. $582,500. b. $537,500. c. $492,500. d. $555,000. During the year, Jantz Company made an entry to write off a $4,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $50,000 and the balance in the allowance account was $4,500. The net realizable value of accounts receivable after the write-off entry was a. $50,000. b. $49,500. c. $41,500. d. $45,500. The following information is available for Reagan Company: Allowance for doubtful accounts at December 31, 2006 Credit sales during 2007 Accounts receivable deemed worthless and written off during 2007 $ 8,000 400,000 9,000
As a result of a review and aging of accounts receivable in early January 2008, however, it has been determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2007. What amount should Reagan record as "bad debt expense" for the year ended December 31, 2007? a. $4,500 b. $5,500 c. $6,500 d. $13,500 Use the following information for questions 59 and 60. A trial balance before adjustments included the following: Debit Sales Sales returns and allowance Accounts receivable Allowance for doubtful accounts 59. $14,000 43,000 760 Credit $425,000
If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is a. $6,700. b. $8,220. c. $8,500. d. $9,740.
Test Bank for Intermediate Accounting, Twelfth Edition If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is a. $3,540. b. $4,300. c. $4,224. d. $5,060. Simpson Company has the following account balances at year-end: Accounts receivable Allowance for doubtful accounts Sales discounts $60,000 3,600 2,400
Simpson should report accounts receivable at a net amount of a. $54,000. b. $56,400. c. $57,600. d. $60,000. 62. Holtzman Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $10,000. During 2007, it wrote off $7,200 of accounts and collected $2,100 on accounts previously written off. The balance in Accounts Receivable was $200,000 at 1/1 and $240,000 at 12/31. At 12/31/07, Holtzman estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2007? a. $2,000. b. $7,100. c. $9,200. d. $12,000. Rusch Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $12,000. During 2007, it wrote off $8,640 of accounts and collected $2,520 on accounts previously written off. The balance in Accounts Receivable was $240,000 at 1/1 and $288,000 at 12/31. At 12/31/07, Rusch estimates that 5% of accounts receivable will prove to be uncollectible. What should Rusch report as its Allowance for Doubtful Accounts at 12/31/07? a. $5,760. b. $5,880. c. $8,280. d. $14,400. Sandler Company has the following account balances at year-end: Accounts receivable Allowance for doubtful accounts Sales discounts Sandler should report accounts receivable at a net amount of a. $72,000. b. $75,200. c. $76,800. d. $80,000. $80,000 4,800 3,200
Cash and Receivables
Delgado Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $20,000. During 2007, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off. The balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31. At 12/31/07, Delgado estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2007? a. $4,000. b. $14,200. c. $18,400. d. $24,000. Burnett Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $15,000. During 2007, it wrote off $10,800 of accounts and collected $3,150 on accounts previously written off. The balance in Accounts Receivable was $300,000 at 1/1 and $360,000 at 12/31. At 12/31/07, Burnett estimates that 5% of accounts receivable will prove to be uncollectible. What should Burnett report as its Allowance for Doubtful Accounts at 12/31/07? a. $7,200. b. $7,350. c. $10,350. d. $18,000. Marley Company received a seven-year zero-interest-bearing note on February 22, 2007, in exchange for property it sold to O’Rear Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2007, 7.5% on December 31, 2007, 7.7% on February 22, 2008, and 8% on December 31, 2008. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2007 and 2008, respectively? a. 0% and 0% b. 7% and 7% c. 7% and 7.7% d. 7.5% and 8% On December 31, 2007, Eller Corporation sold for $75,000 an old machine having an original cost of $135,000 and a book value of $60,000. The terms of the sale were as follows: $15,000 down payment $30,000 payable on December 31 each of the next two years The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2007 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) a. $52,773. b. $67,773. c. $60,000. d. $105,546.
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Test Bank for Intermediate Accounting, Twelfth Edition
Use the following information for questions 69 and 70. Henry Co. assigned $400,000 of accounts receivable to Easy Finance Co. as security for a loan of $335,000. Easy charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Henry collected $110,000 on assigned accounts after deducting $380 of discounts. Henry accepted returns worth $1,350 and wrote off assigned accounts totaling $2,980. 69. The amount of cash Henry received from Easy at the time of the transfer was a. $301,500. b. $327,000. c. $328,300. d. $335,000. Entries during the first month would include a a. debit to Cash of $110,380. b. debit to Bad Debt Expense of $2,980. c. debit to Allowance for Doubtful Accounts of $2,980. d. debit to Accounts Receivable of $114,710.
Use the following information for questions 71 and 72. On February 1, 2007, Norton Company factored receivables with a carrying amount of $300,000 to Koch Company. Koch Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Norton Company for February. 71. Assume that Norton factors the receivables on a without recourse basis. The loss to be reported is a. $0. b. $9,000. c. $15,000. d. $24,000. Assume that Norton factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,500. The loss to be reported is a. $9,000. b. $10,500. c. $15,000. d. $25,500. Joe Novak Corporation factored, with recourse, $100,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Joe Novak estimates the recourse obligation at $2,400. What amount should Joe Novak report as a loss on sale of receivables? a. $ -0-. b. $3,000. c. $5,400. d. $10,400.
Cash and Receivables
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Mortonson Corporation factored, with recourse, $300,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Mortonson estimates the recourse obligation at $7,200. What amount should Mortonson report as a loss on sale of receivables? a. $ -0-. b. $9,000. c. $16,200. d. $31,200. Mike McKinney Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $600,000 and cash collections of $550,000. The accounts receivable turnover is a. 4.0. b. 4.4. c. 4.8. d. 6.0. Nottingham Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $900,000 and cash collections of $850,000. The accounts receivable turnover is a. 6.0. b. 6.6. c. 7.2. d. 9.0. If a petty cash fund is established in the amount of $250, and contains $150 in cash and $95 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $75. b. Petty Cash, $100. c. Cash, $95; Cash Over and Short, $5. d. Cash, $100. If the month-end bank statement shows a balance of $36,000, outstanding checks are $12,000, a deposit of $4,000 was in transit at month end, and a check for $500 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $27,500. b. $28,500. c. $20,500. d. $43,500. In preparing its bank reconciliation for the month of April 2007, Gregg, Inc. has available the following information. Balance per bank statement, 4/30/07 NSF check returned with 4/30/07 bank statement Deposits in transit, 4/30/07 Outstanding checks, 4/30/07 Bank service charges for April What should be the correct balance of cash at April 30, 2007? $39,140 450 5,000 5,200 20
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Test Bank for Intermediate Accounting, Twelfth Edition a. b. c. d. $39,370 $38,940 $38,490 $38,470
Tanner, Inc.’s checkbook balance on December 31, 2007 was $21,200. In addition, Tanner held the following items in its safe on December 31. (1) A check for $450 from Peters, Inc. received December 30, 2007, which was not included in the checkbook balance. (2) An NSF check from Garner Company in the amount of $900 that had been deposited at the bank, but was returned for lack of sufficient funds on December 29. The check was to be redeposited on January 3, 2008. The original deposit has been included in the December 31 checkbook balance. (3) Coin and currency on hand amounted to $1,450. The proper amount to be reported on Tanner's balance sheet for cash at December 31, 2007 is a. $21,300. b. $20,400. c. $22,200. d. $21,750.
The cash account shows a balance of $45,000 before reconciliation. The bank statement does not include a deposit of $2,300 made on the last day of the month. The bank statement shows a collection by the bank of $940 and a customer's check for $320 was returned because it was NSF. A customer's check for $450 was recorded on the books as $540, and a check written for $79 was recorded as $97. The correct balance in the cash account was a. $45,512. b. $45,548. c. $45,728. d. $47,848. In preparing its May 31, 2007 bank reconciliation, Dogg Co. has the following information available: Balance per bank statement, 5/31/07 $30,000 Deposit in transit, 5/31/07 5,400 Outstanding checks, 5/31/07 4,900 Note collected by bank in May 1,250 The correct balance of cash at May 31, 2007 is a. $35,400. b. $29,250. c. $30,500. d. $31,750.
Cash and Receivables
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Multiple Choice Answers—Computational
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
49. 50. 51. 52. 53.
d b c b c
54. 55. 56. 57. 58.
c b b d c
59. 60. 61. 62. 63.
b a b b d
64. 65. 66. 67. 68.
b b d b a
69. 70. 71. 72. 73.
c c b b c
74. 75. 76. *77. *78.
c c c d b
*79. *80. *81. *82.
b c b c
DERIVATIONS — Computational
$2,000,000 × .11 = $200,000 × (.11 – .05) = Interest $220,000 12,000 $232,000
$232,000 ÷ $2,000,000 = .116 = 11.6%. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. b c b c c b b d c b a b b d b b $30,000 + $500 + $8,200 = $38,700. .01 × 360 ÷ 20 = 18%. $540,000 + ($90,000 – $40,000) = $590,000. $600,000 – $62,500 = $537,500. ($50,000 – $4,000) – ($4,500 – $4,000) = $45,500. $8,000 – $9,000 + X = $5,500; X = $6,500 ($425,000 – $14,000) × .02 = $8,220. ($43,000 × .10) – $760 = $3,540. $60,000 – $3,600 = $56,400. ($24,000 × .05) – [$10,000 – ($7,200 – $2,100)] = $7,100. $288,000 × .05 = $14,400. $80,000 – $4,800 = $75,200. $480,000 × .05 – [$20,000 – ($14,400 – $4,200)] = $14,200 $20,000 + $300 + $5,500 = $25,800.
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Test Bank for Intermediate Accounting, Twelfth Edition d $360,000 × .05 = $18,000.
DERIVATIONS — Computational (cont.)
67. 68. 69. 70. 71. 72. 73. 74. 75. 76. *77. *78. *79. *80. *81. *82.
b a c c b b c c c c d b b c b c
7% and 7%. $30,000 × 1.75911 = $52,773. $335,000 – $6,700 = $328,300.
$300,000 × .03 = $9,000. ($300,000 × .03) + $1,500 = $10,500. ($100,000 × .03) + $2,400 = $5,400. ($300,000 × .03) + $7,200 = $16,200. $600,000 ÷ [($100,000 + $150,000) ÷ 2] = 4.8 $900,000 ÷ [($100,000 + $150,000) ÷ 2] = 7.2 $250 – $150 = $100. $36,000 – $12,000 + $4,000 + $500 = $28,500. $39,140 + $5,000 – $5,200 = $38,940. $21,200 + $450 – $900 + $1,450 = $22,200. $45,000 + $940 – $320 – $90 + $18 = $45,548. $30,000 + $5,400 – $4,900 = $30,500.
Ex. 7-94—Asset classification. Below is a list of items. Classify each into one of the following balance sheet categories: a. Cash b. Receivables ____ ____ c. Short-term Investments d. Other
1. Compensating balances held in long-term borrowing arrangements 2. Savings account
Cash and Receivables
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____ ____ ____ ____ ____ ____ ____
3. Trust fund 4. Checking account 5. Postage stamps 6. Treasury bills maturing in six months 7. Post-dated checks from customers 8. Certificate of deposit maturing in five years 9. Common stock of another company (to be sold by December 31, this year)
____ 10. Change fund
Solution 7-94 1. 2. d a 3. 4. d a 5. 6. d c 7. 8. b d 9. 10. c a
Ex. 7-96—Entries for bad debt expense. A trial balance before adjustment included the following: Accounts receivable Allowance for doubtful accounts Sales Sales returns and allowances Debit $80,000 8,000 Credit 730 $340,000
Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales. Solution 7-96 (1) Bad Debt Expense .............................................................. Allowance for Doubtful Accounts ............................. Gross receivables $80,000 Rate 5% Total allowance needed 4,000 Present allowance (730) Adjustment needed $ 3,270 Bad Debt Expense .............................................................. Allowance for Doubtful Accounts ............................. Sales $340,000 3,270 3,270
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Test Bank for Intermediate Accounting, Twelfth Edition Sales returns and allowances Net sales Rate Bad debt expense 8,000 332,000 1% $ 3,320
Ex. 7-97—Accounts receivable assigned. Accounts receivable in the amount of $250,000 were assigned to the Fast Finance Company by Nance, Inc., as security for a loan of $200,000. The finance company charged a 4% commission on the face amount of the loan, and the note bears interest at 9% per year. During the first month, Nance collected $130,000 on assigned accounts. This amount was remitted to the finance company along with one month's interest on the note. Instructions Make all the entries for Nance Inc. associated with the transfer of the accounts receivable, the loan, and the remittance to the finance company.
Cash and Receivables
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Solution 7-97 Cash ............................................................................................... Finance Charge............................................................................... Notes Payable..................................................................... Cash ............................................................................................... Accounts Receivable........................................................... Notes Payable................................................................................. Interest Expense............................................................................. Cash .................................................................................... 192,000 8,000 200,000 130,000 130,000 130,000 1,500 131,500
Pr. 7-98—Entries for bad debt expense. The trial balance before adjustment of Pratt Company reports the following balances: Accounts receivable Allowance for doubtful accounts Sales (all on credit) Sales returns and allowances Instructions (a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales. (b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)? Solution 7-98 (a) (1) Bad Debt Expense......................................................... Allowance for Doubtful Accounts........................ Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance (2,500) Bad debt expense $ 3,500 Bad Debt Expense......................................................... Allowance for Doubtful Accounts........................ Sales $750,000 Sales returns and allowances (40,000) Net sales 710,000 Rate 1% Bad debt expense $ 7,100 3,500 3,500 Dr. $100,000 $ 40,000 Cr. 2,500 750,000
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Test Bank for Intermediate Accounting, Twelfth Edition
Solution 7-98 (cont.) (b) The percentage of receivables approach would be affected as follows: Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance 2,500 Additional amount required $ 8,500 8,500 8,500
The journal entry is therefore as follows: Bad Debt Expense......................................................... Allowance for Doubtful Accounts........................ The entry would not change under the percentage of sales method.
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