Exercise 7-1

1) Aging schedule:

Category Amount Estimated Estimated

percentage amount
uncollectible uncollectible
End of the 500000 10% 50000
year
Less than 200000 30% 60000
a month
More than 100000 75% 75000
a month

Total 800000 185000

2) Journal Entry for Bad Debts

Accounts      
Bad Debt Expense   165000  
Allowance for Doubtful accounts     165000
       
Credit Balance required in allowance
account after adjustment   185000  
Less: Credit balance in allowance account
before adjustment   20000  
       
Amount for bad debts expense entry   165000  
Exercise 7-3

a) Journal Entry for recognizing bad debt: (Income statement method)

Bad Debt Expense   16680  

Allowance for Doubtful Account     16680
       
Credit Balance required in allowance account
after adjustment   19280  
Less: Credit balance in allowance account
before adjustment     2600

Amount for bad debts expense entry   16680  

b) Balance sheet approach:

Bad Debt Expense   16606  

Allowance for Doubtful Account     16606
       
Credit Balance required in allowance
account after adjustment   19206  
Less: Credit balance in allowance
account before adjustment     2600
Amount for bad debts expense entry   16606  
 2.
Income statement method:

Bad Debt Expense   16680  

Allowance for Doubtful Account     16680
       
Credit Balance required in allowance account
after adjustment   14080  
Less: Credit balance in allowance account
before adjustment    2600

Amount for bad debts expense entry   16680  

Balance Sheet Approach:

Bad Debt Expense   16606  

Allowance for Doubtful Account     16606
       
Credit Balance required in allowance
account after adjustment   14006  
Less: Credit balance in allowance
account before adjustment     2600
Amount for bad debts expense entry   16606  

Problem 7-1A

1) Journal Entry for accounts receivable and write offs

Account Receivable   630000  

Cash   157500  
       
Sales Revenue     787500
To record sales for year 787500*80% = 630000
       
Cash   502500  
Account Receivable     502500
        
Allowance for Doubtful Account   3000  
Accounts Receivable     3000

2)

a)
Accounts      
Bad Debt Expense   18900  
Allowance for Doubtful accounts     18900
       
Credit Balance required in allowance account
after adjustment   15900  
Less: Credit balance in allowance account
before adjustment   3000  
       
Amount for bad debts expense entry   18900  

b)

Accounts      
Bad Debt Expense   14820  
Allowance for Doubtful accounts     14820
       
Credit Balance required in allowance account
after adjustment   11820  
Less: Credit balance in allowance account
before adjustment   3000  
       
Amount for bad debts expense entry   14820  

3) a) Net realizable value = End balance from Accounts Receivable -Ending Balance of ADA
= 229500-17850
=211650
b. Net Realizable Value = End Balance from Account Receivable – Ending Balance of ADA
= 229500- 13770
= 215730
4)
 Recognition of bad debts decrease the net realizable value
 Write off doesn’t have any impact on net realizable value

Problem 7-2A
1)
Estimated
percentage Estimated amount
Category Amount uncollectible uncollectible
Current 200000 10% 20000
Less than a month 60300 25% 15075
One to Two
Months 35000 35% 12250
Over Two Months 45000 75% 33750
       
Total 340300   81075

2)

Estimated
percentage Estimated amount
Category Amount uncollectible uncollectible
Current 200000 10% 20000
Less than a month 60300 25% 15075
One to Two
Months 35000 35% 12250
Over Two Months 5000 75% 3750
       
Total 300300   51075

3) Journal Entry:

Accounts    
Bad Debt Expense 16485  
Allowance for Doubtful accounts   16485
     
Credit Balance required in allowance account after adjustment 51075  
Less: Credit balance in allowance account before adjustment 34590  
     
Amount for bad debts expense entry 16485  

Balance Sheet Entry:

 Asset = Liabilities + Stockholder's
Equity

Allowance for Doubtful Accounts (16485)

=(16485)

Exercise 8-3

Forklift price 6,000

Residual value 600
Last for 5 years

Using Double declining balance:

100%/useful life * 2 = 40%

Year Rate Beginning Book Value Depreciation Ending Book Value

2012 40% 6,000.00 2,400.00 3,600.00
2013 40% 3,600.00 1,440.00 2,160.00
2014 40% 2,160.00 864.00 1,296.00
2015 40% 1,296.00 518.40 777.60
2016 40% 777.60 177.60 600.00

Journal Entry for Depreciation:

Depreciation
expense (DDB
method) :     2,400.00  
Accumulated
  Depreciation (2012)     2,400.00

Koffman Warehouse recently spent $6,000.00 on a forklift. They can lower their entire income and cut
their tax liability by demonstrating double depreciation. Additionally, the investment decreased their
liquidity; hence, with fewer taxes to pay, liquidity won't be greatly affected.
Exercise 8-5

Cost of machine 80,000.00

Salvage value 8,000.00
Useful life 9 years

Using straight line, the rate of depreciation will be 8000 per year

On 2014 they discovered that the machine will be used only till 2017: 64000

New Salvage value $2,000.00

New useful life remaining 4 years from 2014 - 2017 end.

Revised depreciation = 15500 year

Accumulated
Year Beginning Book Value Depreciation Expense Ending Book Value Depreciation
2012 80,000.00 8,000.00 72,000.00 8,000.00
2013 72,000.00 8,000.00 64,000.00 16,000.00
         
2014 64,000.00 15,500.00 48,500.00 31,500.00
2015 48,500.00 15,500.00 33,000.00 47,000.00
2016 33,000.00 15,500.00 17,500.00 62,500.00
2017 17,500.00 15,500.00 2,000.00 78,000.00

The depreciation recorded on 2012-13 was not correct.

A piece of equipment's useful life cannot be anticipated with any degree of certainty. The machine was
supposed to survive nine years according to an earlier computation, but it actually only lasted six. We
first learn about the machine's true-life lifetime in 2014. A certain measure of deprivation has already
built up as of 2014. Taking that into consideration, we modified depreciation for the remainder of the
term. Therefore, we don't need to change the past values because we have already corrected the
subsequent set of values.
Problem 8-3

Cost of truck: $33,600.00

Salvage value: NIL

Useful life: 6 years

Using straight line, the machine would be depreciating at the rate of: 5,600.00 /year

Year Straight- MACRS

Line
Year 1 5,600.00 6,720.00
Year 2 5,600.00 10,750.00
Year 3 5,600.00 6,450.00
Year 4 5,600.00 3,870.00
Year 5 5,600.00 3,870.00
Year 6 5,600.00 1,940.00
2)

Two types of different depreciation can be used while creating two kinds of different financial
accounting. This is completely legal.

Typically, a corporation aims to provide readers of financial statements a positive and straightforward
impression. The simplicity of the straight-line method and the way it maximizes net income make
shareholders feel good about the business. However, we use the accelerated depreciation method to
show a significant expense in the initial years for tax purposes. Because of the low net income, the
corporation must pay fewer taxes. This aids the business in preserving its cash liquidity.

Problem 8-6

Accounts Debit Credit

$
Equipment purchased (truck)   14,000.00  
 $
  Cash   14,000.00
       
Equipment (Tool chest, side racks)   4,800.00  
  Cash   4,800.00
Paint trays and roller covers   150  
  Cash   150
Ladders and scaffolding   1600.08  
  Cash   1600.08
Storage Cabinet   450  
  Cash   450
Depreciation expense (used truck)   3,300.00  
Depreciation expense (cabinet)   50.00  
Depreciation expense (ladders &
scaffolding)   400.02  
Accumulated depreciation
  (2012)   3,750.02
Licensing expense   500.00  
  License acquired   500.00
Loss incurred selling old truck   1,133.33  
  Account Receivables   1,133.33

Fair-market values Auction values

       
Paint trays and roller covers: 200.00 6.25% 150.00
Storage cabinets 600.00 18.75% 450.00
Ladders &scaffolding 2,400.00 66.67% 1,600.08

Depreciation of truck bought on Jan 1 2012: $3,300.00 per year

Depreciation of cabinet $50.00 per year

Depreciation of ladder & scaffolding: $400.02 /year

For Old truck

cost $ 12,000.00
useful life expected 96 months
useful life 52 months
 $116.6
depreciation expected 7

total depreciation in 52
months 6,066.67

value remained after 52 months $5,933.33

actual salvage price $4,800.00

total loss $1,133.33

Value of truck at 2012year end: $10,700.00