Solution: P7-3 (L03) Bad-Debt Reporting—Aging (CMA Adapted)

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-
end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and
Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance
reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging
schedule shown below.

Probability of
Days Account Outstanding Amount Collection
Less than 16 days $ 300,000 0.98
Between 16 and 30 days 100,000 0.90
Between 31 and 45 days 80,000 0.85
Between 46 and 60 days 40,000 0.80
Between 61 and 75 days 20,000 0.55
Over 75 days 15,000 0

Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

Expected
Percentage Estimated
Days Account Outstanding Amount Uncollectible Uncollectible
0–15 days $ 300,000 0.02 $ 6,000
16–30 days 100,000 0.10 10,000
31–45 days 80,000 0.15 12,000
46–60 days 40,000 0.20 8,000
61–75 days 20,000 0.45 9,000
Balance for Allowance for Doubtful Accounts $ 45,000

(b) Show how accounts receivable would be presented on the balance sheet.

Accounts receivable $ 540,000

Less: Allowance for doubtful accounts (45,000)
Accounts receivable (net) $ 495,000

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

The year-end bad debt adjustment would decrease before-tax income $20,000 as
computed below:

Estimated amount required in the Allowance for Doubtful Accounts $ 45,000

Balance in the account after write-off of uncollectible accounts but
before adjustment 25,000
Required charge to expense $20,000
Solution: E7-5 (L02) Recording Sales Gross and Net
During June, the following transactions were incurred by Arnold Company:

On June 3, Arnold Company sold to Chester Company merchandise for $3,000

with terms of 2/10, n/60, f.o.b. shipping point. $ 3,000

An invoice, terms n/30, was received by Chester on June 8 from John Booth 90
Transport Service for the freight cost.

On June 12, the company received a check for the balance due from Chester
Company.

Instructions
(a) Prepare journal entries on the Arnold Company books to record all the events noted above
under each of the following bases.
(1) Sales and receivables are entered at gross selling price.
(2) Sales and receivables are entered at net of cash discounts.

Date Accounts Debit Credit

1. June 3 Accounts Receivable—Chester 3,000
Sales Revenue 3,000

June 12 Cash 2,940

Sales Discounts 60
Accounts Receivable—Chester 3,000

2. June 3 Accounts Receivable—Chester 2,940

Sales Revenue 2,940

June 12 Cash 2,940

Accounts Receivable—Chester 2,940

(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit
payment until July 29.

July 29 Cash 3,000

Accounts Receivable—Chester 2,940
Sales Discounts Forfeited 60
 PROBLEM 7-8

(a) 31-Dec-17
Schedule of Note Discount Amortization

Cash Interest
Date Received Revenue

12/31/2017 — —
12/31/2018 $20,000 $6,825a
12/31/2019 20,000 5,376
12/31/2020 20,000 3,768
12/31/2021 20,000 1,982

$6,825 = $62,049 X 11%

a

$48,874 = $62,049 + $6,825 – $20,000.00

b

Cash 40,000
Notes Receivable 80,000
Discount on Notes Receivable 17,951
Service Revenue 102,049

To record revenue at the present value of the note plus the immediate cash
payment:
PV of $20,000 annuity @ 11% for
4 years ($20,000 X 3.10245) $62,049
Down payment 40,000
Capitalized value of services $102,049

(b) 31-Dec-18
Cash 20,000
Notes Receivable 20,000

Discount on Notes Receivable 6,825

Interest Revenue 6,825

(c) 31-Dec-19
Cash 20,000
Notes Receivable 20,000

Discount on Notes Receivable 5,376

Interest Revenue 5,376

(d) 31-Dec-20
Cash 20,000
Notes Receivable 20,000
Discount on Notes Receivable 3,768
Interest Revenue 3,768

(e) 31-Dec-21
Cash 20,000
Notes Receivable 20,000

Discount on Notes Receivable 1,982

Interest Revenue 1,982
 Carrying
Amount of
Note
$62,049
48,874b
34,250
18,018
—
 *EXERCISE 7-25 (15–20 minutes)

(a) Logan Bruno Company

Bank Reconciliation, August 31, 2017
County National Bank
Balance per bank statement, August 31, 2017
Add: Cash on hand $310
Deposits in transit 3,800

Deduct: Outstanding checks

Correct cash balance

Balance per books, August 31, 2017

($10,050 + $35,000 – $34,903)
Add: Note ($1,000) and interest ($40) collected

Deduct: Bank service charges $20

Understated check for supplies 18
Correct cash balance

(b)
Cash 1,040
Notes Receivable
Interest Revenue
(To record collection of note and interest)

*EXERCISE 7-25 (Continued)

Office Expense—bank service charges 20

Cash
(To record August bank charges)

Supplies Expense 18
Cash
(To record error in recording check for
supplies)

(c)
The correct cash balance of $11,149 would be reported in the August 31, 2017, balance sheet.
 $8,089

4,110
12,199
1,050
$11,149

$10,147
1,040
11,187

38
$11,149

1,000
40

20

18

017, balance sheet.