Review Questions for Test #1

Chapter 8- Estimating Uncollectibles:

At the December 31, 2014 the year, the M. I. Wright Company showed the following
selected account balances:
 
Sales (all on credit) $300,000
Accounts Receivable 800,000
Allowance for Doubtful Accounts (a credit balance) 38,000
Required:

1. Assume the company estimates that 1% of all credit sales will not be collected.
A. Prepare the proper journal entry to recognize the expense involved.
B. Present the balances in Accounts Receivable and Allowance for Doubtful Accounts as they
would appear on the Balance Sheet. Also show the net realizable Accounts Receivable.
2. Assume the company estimates that 5% of its accounts receivable will never be collected.
A. Prepare the proper journal entry to recognize the expense involved.
B. Present the balances in Accounts Receivable and Allowance for Doubtful Accounts as they
would appear on the Balance Sheet. Also show the net realizable Accounts Receivable.
3. Under assumptions 1 and 2 above, give the proper journal entries for the following events which
happened in 2015.
June 3 John Shifty, who owes us $500, informs us that he is broke and cannot pay. We believe
him.
Nov. 9 We learn that John Shifty has won the lottery and he pays his account balance.
Solution: Chapter 8- Estimating Uncollectibles:
Bad Debts Expense 2014 % of sales method
1A. Bad Debts Expense ................................................................ 3,000
Allowance for Doubtful Accounts .................................... 3,000
($ 300,000 X 1 %=3,000) Credit sales is used to determine expense amount.

1B. Accounts Receivable .............................................................. $800,000

Less: Allowance for Doubtful Accounts ................................ . 41,000
Estimated Realizable Accounts Receivable ............................ $759,000
2A. Bad Debts Expense 2014 % of accounts receivable method
$ 800,000 X 5 %=40,000 This is the desired balance in allowance account. There is currently a
balance of $38,000 (credit) in the account. An additional $2,000 will be required to achieve
desired balance.
Accounts receivable balance is used to estimate the desired balance in Allowance for Doubtful
Accounts. Journal entry is created to achieve this balance.
Bad debt expense…………………………………………… 2,000
2B. Allowance
Accounts for Doubtful
Receivable Accounts………………….. 2,000
.............................................................. $800,000
Less: Allowance for Doubtful Accounts ................................ . 40,000
Estimated Realizable Accounts Receivable ........................... $760,000
3.Both assumptions 1 and 2 above represent the allowance method of accounting for
uncollectibles. The only difference is in the approach to estimating uncollectibles. Therefore the
entries to write-off and show subsequent reinstatement would be the same in 1 and 2.

Entry to write off uncollectible account

June 3 Allowance for Doubtful Accounts 500
Accounts Receivable/John Shifty 500
Entries to record collection from Shifty
Nov. 9 Accounts Receivable/John Shifty 500
Allowance for Doubtful Accounts 500
This entry will reinstate the customer account. (We have to do this first as there is no place to put
Shifty’s money!)

Nov. 9 Cash ............................................................... 500

Accounts Receivable/John Shifty ............ .................500
Customer payment is recorded in the normal way.

Note: Bad Debts Expense will be closed at year end since it is an expense account. There would be no
closing entry for the Allowance for Doubtful Accounts as it is not a temporary account. It is a contra-
asset account, contra to Accounts Receivable.
Problem 7-6B Preparing a bank reconciliation and recording adjustments:
The following information was available to reconcile Frogbox Moving's book Cash balance with its
bank statement balance as of December 31, 2017:
a. The December 31 Cash balance according to the accounting records was $12,644, and the bank
statement balance for that date was $13,650.

b. Cheque #3115 for $1,213 and cheque #3201 for $694, both written and entered in the accounting records
in December, were not among the cancelled cheques returned. Two cheques, #3207 for $3,260 and #3221
for $984, were outstanding on November 30 when the bank and book statement balances were last
reconciled. Cheque #3207 was returned with the December cancelled cheques, but cheque #3221 was not.

c. When the December cheques were compared with entries in the accounting records, it was found that
cheque #3199 had been correctly written for $3,910 to pay for office supplies, but was erroneously entered
in the accounting records as though it were written for $9,310.

d. Two debit memoranda were included with the returned cheques and were unrecorded at the time of the
reconciliation. One of the debit memoranda was for $1,620 and dealt with an NSF cheque for $1,570 that
had been received from a customer, Tork Industries, in payment of its account. It also assessed a $50 fee for
processing. The second debit memorandum covered cheque printing and was for $35. These transactions
had not been recorded by Frogbox before receiving the statement.

e. A credit memorandum indicated that the bank had collected a $4,000 note receivable for the company,
deducted a $15 collection fee, and credited the balance to the company's account. This transaction was not
recorded by Frogbox before receiving the statement.

f. The December 31 cash receipts, $9,615, had been placed in the bank's night depository after banking
hours on that date and did not appear on the bank statement.
Cont’d: Problem 7-6B Preparing a bank reconciliation and recording adjustments:

Required:
1. Prepare a bank reconciliation for the company as of December 31.

2. Prepare the General Journal entries necessary to bring the company's book
balance of Cash into conformity with the reconciled balance.

Analysis Component: Explain the nature of the messages conveyed by a bank to one of
its depositors when the bank sends a debit memo and a credit memo to the depositor.
 Solution: Problem 7-6B:
Part 1
FROGBOX MOVING
Bank Reconciliation
December 31, 2014
2017
Bank statement balance .............. $13,650 Book balance of cash .............. $12,644
Add: Add:
Deposit of December 31 ............ 9,615 Error recording Cheque
No. 3199 ............................. 5,400
Proceeds of note less
collection charge ............... 3,985
$23,265 $22,029
Deduct: Deduct:
Cheques No. 3221 ..... $ 984 NSF — Tork
3115 ..... 1,213 Ind. ..................... $1,620
3201 ..... 694 2,891 Printing charge ...... 35 1,655
Adjusted bank balance ................ $20,374 Adjusted book balance ............ $20,374

Part 2
Dec. 31 Cash ............................................................................ 5,400
Office Supplies .................................................... 5,400
To correct error for Cheque #3199.

31 Cash ............................................................................ 3,985

Collection Expense ..................................................... 15
Notes Receivable................................................. 4,000
To record collection of note less collection fee.

31 Accounts Receivable — Tork Industries .................... 1,620

Cash .................................................................... 1,620
To record NSF cheque.

31 Office Supplies Expense ............................................ 35

Cash .................................................................... 35
To record cheque printing charge.
Cont’d Solution: Problem 7-6B:

Analysis component:

In a banking context, a debit memo is a notification from the bank that they have
debited the depositor's account. Since the depositor’s account is a liability of the
bank (a credit balance account), the debit notification means they have reduced
the depositor’s account balance. Conversely, a credit memo is a notification that
the depositor’s account has been credited, which means increased the depositor’s
account balance.
Exercise 7-6: Petty cash fund:

Willard Company established a $400 petty cash fund on September 9, 2017. On

September 30, the fund had $159.40 in cash along with receipts for these
expenditures: transportation-in, $32.45; office supplies, $113.55; and repairs
expense, $87.60. Willard uses the perpetual method to account for merchandise
inventory. The petty cashier could not account for the $7.00 shortage in the fund.

a. Prepare the September 9 entry to establish the fund.

b. Prepare a summary of the petty cash payments similar to Exhibit 7.3 and
record the entry on September 30 to reimburse the fund and reduce it to $250.

Analysis Component: You are the senior marketing manager and are reviewing the
unadjusted account balances for your division. You notice the $7.00 cash shortage
recorded on September 30 regarding petty cash. The current petty cash custodian has
been in place for three months. What should be done, if anything? Explain.
Solution: Exercise 7-6:

a.
2017
2014
Sept. 9 Petty Cash ................................................................. 400.00
Cash................................................................... 400.00
To establish the fund.
b.
Willard Company
Petty Cash Payments Report

September 9 – 30, 2014: 2017

Receipts:
Merchandise inventory ........................................ $ 32.45
Office supplies ..................................................... 113.55
Repairs expense .................................................. 87.60
Total receipts .............................................................. $233.60)
Fund total .................................................................... $400.00
Less: Cash remaining ................................................ 159.40
Equals: Cash required to replenish petty cash ......... 240.60)
Cash over/(short) ........................................................ ($ 7.00)

Sept. 30 Merchandise Inventory ............................................. 32.45

Office Supplies Expense*.......................................... 113.55
Repairs Expense ....................................................... 87.60
Cash Over and Short ................................................. 7.00
Cash ................................................................... 240.60
To reimburse the fund

Cash .......................................................................... 150.00

Petty Cash ......................................................... 150.00
To decrease the fund by $150.
Cont’d Solution: Exercise 7-6:

Analysis component:
There are several things that could be done. The Marketing Manager should review the
prior month’s petty cash journal entries to determine if the shortage is an anomaly or a
recurring event. Hopefully it is an anomaly but, regardless, the manager will need to
question the Petty Cash Custodian about the $7 cash shortage recorded in September. It
is important to recognize that honest errors do occur. It is also possible that the Petty
Cash Custodian requires training to help him manage the petty cash fund. If it is
determined that the error was based on dishonesty, appropriate action will have to be
taken (which normally results in the dismissal of the employee as a minimum).

* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could be
debited. However, if supplies are being purchased through Petty Cash it is likely that
they are for immediate use which justifies using an expense account over an asset.
Problem 7-4B: Preparing a bank reconciliation and recording adjustments:
Mae Telford, the controller of the Baylor Company, provided the following information:

The Cash account in the general ledger appeared as follows

The following bank statement is available for
on November 30 (Baylor Company uses only a general journal
November 2017:
to record transactions):
Cont’d Problem 7-4B: Preparing a bank reconciliation and recording adjustments:

Required :

a. Prepare a bank reconciliation for Baylor Company for the month of November 2017.
Assume that any errors made were by the bookkeeper (cheque #547 was for
advertising expense; the deposit of November 9 was regarding a credit customer, Val
Pacino).

b. Prepare the necessary entries resulting from the bank reconciliation.

Analysis Component: You have been employed with Baylor Company since November
1, 2017, and part of your job is writing and recording cheques as well as preparing the
bank reconciliation. In reviewing the cheques returned by the bank, you notice that the
payee on cheque #543 is the employee you recently replaced. You investigate further
and find that the journal entry recording cheque #543 debited Office Supplies Expense.
What should you do? Explain.
Solution: Problem 7-4B:
a.
BAYLOR COMPANY
Bank Reconciliation
November 30, 2017
Bank statement balance .............. $11,620.97 Book balance..................... $4,716.06
Add: Add:
Deposit of Nov. 29 ..................... 1,250.65 Error Nov. 9 deposit 36.00
$12,871.62 $4,752.06
Deduct:
Outstanding cheques:
No. 548 ........... $ 56.45 Deduct:
No. 550 ........... 3,457.15 Bank charges .... $115.00
No. 552 ........... 5,556.71 Error #547 ........ 1,800.00
No. 553 ........... 964.25 1,915.00
10,034.56

Adjusted bank balance ................ $ 2,837.06 Adjusted book balance ..... $2,837.06

b.
Nov. 30 Bank Service Charges Expense ................................... 115.00
Cash ....................................................................... 115.00
To record November bank charges.

Nov. 30 Advertising Expense ..................................................... 1,800.00

Cash ....................................................................... 1,800.00
To account for error in Cheque #547.

Nov. 30 Cash ............................................................................... 36.00

Accounts receivable – Val Pacino ........................ 36.00
To account for error in customer deposit.
 Cont’d Solution: Problem 7-4B:

Analysis component:
Because your position does not represent good internal controls (writing and recording
of cheques should be segregated, if possible, from the preparation of the bank
reconciliation), there is the potential for fraud. You should review the journal entry
regarding cheque #543 to verify whether the payee is a legitimate supplier. This
information should be brought to the supervisor’s attention. If the payee was not
legitimate, prior bank reconciliations should be reviewed to determine if this was a
recurring situation. If conflicting duties cannot be segregated in future, the bank
reconciliations should be reviewed regularly by a supervisor/owner of the business.