# Cash in bank checking account \$22,500 U.S. treasury bills 5,000 Cash on hand 1,350 Undeposited customer checks 1,840 Total \$30,690 Requirement 2

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1 Chapter 7 Solutions EXERCISES Exercise 7 2 Cash and cash equivalents includes: Cash in bank checking account \$22,500 U.S. treasury bills 5,000 Cash on hand 1,350 Undeposited customer checks 1,840 Total \$30,690 The \$10,000 in 6 month treasury bills should be classified as a current asset along with other temporary investments. Exercise 7 5 Sales price = 100 units x \$600 = \$60,000 x 70% = \$42,000 November 17, 2013 Accounts receivable... 42,000 Sales revenue... 42,000 November 26, 2013 Cash (98% x \$42,000)... 41,160 Sales discounts (2% x \$42,000) Accounts receivable... 42,000 November 17, 2013 Accounts receivable... 42,000 Sales revenue... 42,000

2 December 15, 2013 Cash... 42,000 Accounts receivable... 42,000 Requirement 3, using the net method: November 17, 2013 Accounts receivable... 41,160 Sales revenue (98% x \$42,000)... 41,160 November 26, 2013 Cash... 41,160 Accounts receivable... 41,160, using the net method: November 17, 2013 Accounts receivable... 41,160 Sales revenue (98% x \$42,000)... 41,160 December 15, 2013 Cash... 42,000 Accounts receivable... 41,160 Interest revenue

3 Exercise 7 6 Sales price = 1,000 units x \$50 = \$50,000 July 15, 2013 Accounts receivable... 50,000 Sales revenue... 50,000 July 23, 2013 Cash (98% x \$50,000)... 49,000 Sales discounts (2% x \$50,000)... 1,000 Accounts receivable... 50,000 July 15, 2013 Accounts receivable... 50,000 Sales revenue... 50,000 Aug. 15, 2013 Cash... 50,000 Accounts receivable... 50,000

4 Exercise 7 7 July 15, 2013 Accounts receivable... 49,000 Sales revenue (98% x \$50,000)... 49,000 July 23, 2013 Cash... 49,000 Accounts receivable... 49,000 July 15, 2013 Accounts receivable... 49,000 Sales revenue (98% x \$50,000)... 49,000 August 15, 2013 Cash... 50,000 Accounts receivable... 49,000 Interest revenue... 1,000

5 Exercise 7 8 Estimated returns = 4% x \$11,500,000 = \$460,000 Less: Actual returns (450,000) Remaining estimated returns \$10,000 To record the actual sales returns Sales returns ,000 Accounts receivable ,000 Inventory ,500 Cost of goods sold (\$450,000 x 65%) ,500 December 31, 2013 To record the estimated sales returns Sales returns... 10,000 Allowance for sales returns... 10,000 Inventory estimated returns... 6,500 Cost of goods sold (\$10,000 x 65%)... 6,500 Note: another series of journal entries that produce the same end result would be: To record the estimated sales returns Sales returns (4% x \$11,500,000) ,000 Allowance for sales returns ,000 Inventory estimated returns ,000 Cost of goods sold (65% x \$460,000) ,000 To record the actual sales returns Allowance for sales returns ,000 Accounts receivable ,000 Inventory ,500 Inventory estimated returns (\$450,000 x 65%) ,500

6 Exercise 7 8 (continued) Beginning balance in allowance account \$300,000 Add: Year-end estimate 460,000 Less: Actual returns (450,000) Ending balance in allowance account \$310,000

7 Exercise 7 10 Bad debt expense = \$67,500 (1.5% x \$4,500,000) Allowance for uncollectible accounts Balance, beginning of year \$42,000 Add: Bad debt expense for 2013 (1.5% x \$4,500,000) 67,500 Less: End of year balance (40,000) Accounts receivable written off \$69,500 Requirement 3 \$69,500 the amount of accounts receivable written off.

8 Exercise 7 11 To record the write off of receivables: Allowance for uncollectible accounts... 21,000 Accounts receivable... 21,000 To reinstate an account previously written off and to record the collection: Accounts receivable... 1,200 Allowance for uncollectible accounts... 1,200 Cash... 1,200 Accounts receivable... 1,200 Allowance for uncollectible accounts: Balance, beginning of year \$32,000 Deduct: Receivables written off (21,000) Add: Collection of receivable previously written off 1,200 Balance, before adjusting entry for 2013 bad debts 12,200 Required allowance: 10% x \$625,000 (62,500) Bad debt expense \$50,300 To record bad debt expense for the year: Bad debt expense... 50,300 Allowance for uncollectible accounts... 50,300 Current assets: Accounts receivable, net of \$62,500 allowance for uncollectible accounts \$562,500

9 Exercise 7 13 (\$ in millions) Allowance for uncollectible accounts: Balance, beginning of year \$15.8 Add: Bad debt expense 12.7 Less: End of year balance (16.3) Write offs during the year \$ 12.2* Allowance writeoffs 16.3 Accounts receivable analysis: Balance, beginning of year \$ 1,057.4 (\$1, ) Add: Credit sales 14,880.2 Less: Write offs* (12.2) Less: Balance, end of year (1,178.6) (\$1, ) Cash collections \$14,746.8 Gross A/R 1, , collections 1,178.6

10 Exercise 7 23 March 17, 2013 Allowance for uncollectible accounts... 1,700 Accounts receivable... 1,700 March 30, 2013 Note receivable... 20,000 Cash... 20,000 Step 1: Accrue interest earned for two months on note receivable. May 30, 2013 Interest receivable Interest revenue (\$20,000 x 7% x 2 /12) Step 2: Add interest to maturity to calculate maturity value. Step 3: Deduct discount to calculate cash proceeds. \$20,000 Face amount 1,400 Interest to maturity (\$20,000 x 7%) 21,400 Maturity value (1,427) Discount (\$21,400 x 8% x 10 /12) \$19,973 Cash proceeds

11 Exercise 7 23 (continued) Step 4: Record a loss for the difference between the cash proceeds and the note s book value. May 30, 2013 Cash (proceeds determined above)... 19,973 Loss on sale of note receivable (difference) Interest receivable (from adjusting entry) Note receivable (face amount)... 20,000 June 30, 2013 Accounts receivable... 12,000 Sales revenue... 12,000 July 8, 2013 Cash (\$12,000 x 98%)... 11,760 Sales discounts (\$12,000 x 2%) Accounts receivable... 12,000 August 31, 2013 Notes receivable (face amount)... 6,000 Discount on note receivable (\$6,000 x 8% x 6 /12) Investments (book value)... 5,000 Gain on sale of investments (difference) December 31, 2013 Bad debt expense (\$700,000 x 2%)... 14,000 Allowance for uncollectible accounts... 14,000

12 Exercise 7 23 (concluded) To accrue interest earned on note receivable: December 31, 2013 Discount on note receivable Interest revenue (\$6,000 x 8% x 4 /12) Exercise 7 24 Second quarter: Receivables turnover = \$19,953 = times \$11,260 Average collection = 91 = days period Third quarter: Receivables turnover = \$16,428 = 1.43 times \$11,453.5 Average collection = 91 = days period 1.43

13 Exercise 7 29 Step 1: Bank Balance to Corrected Balance Balance per bank statement \$38,018 Add: Deposits outstanding 6,300 Deduct: Checks outstanding (8,420) Add: Bank error in recording check 270 Corrected cash balance \$36,168 Step 2: Book Balance to Corrected Balance Balance per books \$38,918 Add: Error in recording cash receipt (\$2, ) 1,800 Deduct: Service charges (30) NSF checks (1,200) Automatic monthly loan payment (3,320) Corrected cash balance \$36,168 To correct error in recording cash receipt from credit customer: Cash... 1,800 Accounts receivable... 1,800 To record credits to cash revealed by the bank reconciliation: Miscellaneous expense (bank service charges) Accounts receivable (NSF checks)... 1,200 Interest expense Note payable... 3,000 Cash... 4,550 Note: Each of the adjustments to the book balance required journal entries. None of the adjustments to the bank balance require entries.

14 PROBLEMS Problem 7 1 Monthly bad debt expense accrual summary. Bad debt expense (3% x \$2,620,000)... 78,600 Allowance for uncollectible accounts... 78,600 To record year 2013 accounts receivable write offs: Allowance for uncollectible accounts... 68,000 Accounts receivable... 68,000 Bad debt expense... 4,300 Allowance for uncollectible accounts (below)... 4,300 Year end required allowance for uncollectible accounts: Summary Percent Estimated Age Group Amount Uncollectible Allowance 0 60 days \$430,000 4% \$17, days 98,000 15% 14, days 60,000 25% 15,000 Over 120 days 55,000 40% 22,000 Totals \$643,000 \$68,900

15 Problem 7 1 (concluded) Allowance for uncollectible accounts: Beginning balance \$54,000 Add: Monthly bad debt accruals 78,600 Deduct: Write offs (68,000) Balance before year end adjustment 64,600 Required allowance (determined above) 68,900 Required year end increase in allowance \$ 4,300 Requirement 3 Bad debt expense for 2013: Monthly accruals \$78,600 Year end adjustment 4,300 Total \$82,900 Balance sheet: Current assets: Accounts receivable, net of \$68,900 allowance for uncollectible accounts \$574,100 Problem (\$ in thousands) Accounts receivable, net \$39,098 \$23,963 Add: Allowances Accounts receivable, gross \$39,519 \$24,451 (\$ in thousands) The answers to this question require an analysis of both gross accounts receivable and the allowance for uncollectible accounts for First of all, 2011 sales of \$369,571 plus the increase in receivables reported in the statement of cash flows indicates cash received from customers of \$354,436 (\$369,571 15,135).

16 The activity in gross accounts receivable would be: Gross Accounts Receivable (\$ in thousands) Beg. Bal. 24,451 Sales 369, ,436 Collections 67 Write offs End. Bal. 39,519 The journal entry to record write offs would be: Allowance for Uncollectible Accounts Accounts Receivable Considering the allowance for uncollectible accounts in light of these write offs allows us to solve for bad debt expense: Allowance for Uncollectible Accounts (\$ in thousands) 488 Beg. Bal. Write offs 67 0 Bad Debt Expense 421 End. Bal. Cirrus recognized zero bad debt expense during 2011.

17 Problem 7 4 To record accounts receivable written off during the year 2013: Allowance for uncollectible accounts... 35,000 Accounts receivable... 35,000 To record collection of account receivable previously written off: Accounts receivable... 3,000 Allowance for uncollectible accounts... 3,000 Cash... 3,000 Accounts receivable... 3,000 (a) December 31, 2013 Bad debt expense (3% x \$1,750,000)... 52,500 Allowance for uncollectible accounts... 52,500 (b) December 31, 2013 Bad debt expense... 36,700 Allowance for uncollectible accounts (below)... 36,700

18 Problem 7 4 (continued) Accounts receivable analysis: Beginning balance \$ 462,000 Add: Credit sales 1,750,000 Less: Write offs (35,000) Less: Cash collections (1,830,000) Ending balance \$ 347,000 \$347,000 x 10% = \$34,700 = Required allowance for uncollectible accounts Allowance for uncollectible accounts analysis: Beginning balance \$30,000 Add: Collection of receivable previously written off 3,000 Less: Write offs (35,000) Balance before adjustment (2,000) debit balance Required allowance (determined above) 34,700 Bad debt expense adjustment \$36,700 (c) December 31, 2013 Bad debt expense... 37,047 Allowance for uncollectible accounts (below)... 37,047 Required allowance: Age Group Amount Percent Uncollectible Estimated Allowance 0 60 days \$225,550 4% \$ 9, days 69,400 15% 10, days 34,700 25% 8,675 Over 120 days 17,350 40% 6,940 Totals \$347,000 \$35,047

19 Problem 7 4 (concluded) Allowance for uncollectible accounts analysis: Beginning balance \$30,000 Add: Collection of receivable previously written off 3,000 Less: Write offs (35,000) Balance before adjustment (2,000) debit balance Required allowance 35,047 Bad debt expense adjustment \$37,047 Requirement 3 Accounts receivable Year end allowance (a) \$347,000 [(2,000) + 52,500] = \$296,500 (b) \$347,000 34,700 = \$312,300 (c) \$347,000 35,047 = \$311,953

20 Problem 7 5 (\$ in thousands) Accounts receivable, net \$837,010 \$758,200 Add: Allowances 20,991 23,314 Accounts receivable, gross \$858,001 \$781,514 (\$ in thousands) Analysis of allowance for doubtful accounts Balance, beginning of year \$8,915 Add: Bad debt expense 1,500 Less: Balance end of year (8,863) Write offs \$1,552 Requirement 3 (\$ in thousands) Analysis of allowance for sales returns Balance, end of year \$12,128 Add: Actual returns 3,155 Less: Balance beginning of year (14,399) Estimated sales returns \$ 884 Gross sales for the year equal net sales of \$6,149,800 + estimated sales returns of \$884 = \$6,150,684 thousand. Requirement 4 (\$ in thousands) Accounts receivable analysis: Balance, beginning of year \$ 781,514 Add: Credit sales 6,150,684 Less: Bad debt write offs (1,552) Less: Actual sales returns (3,155) Less: Balance end of year (858,001) Cash collections \$6,069,490

21 Problem 7 13 Computation of balance per books: Balance per bank statement \$14, Add: Deposits outstanding Deduct: Checks outstanding (1,320.25) Error in recording rent check (18.00) Add: Automatic mortgage payment Add: Bank service charges Deduct: Deposit credit to company s account in error (875.00) Add: NSF check charge Balance per books \$13, Step 1: Bank Balance to Corrected Balance Balance per bank statement \$14, Add: Deposits outstanding Deduct: Bank error deposit incorrectly credited to company account (875.00) Checks outstanding (1,320.25) Corrected cash balance \$13, Step 2: Book Balance to Corrected Balance Balance per books \$13, Add: Error in recording rent check Deduct: Automatic mortgage note payment (450.00) Service charges (14.00) NSF checks (85.00) Corrected cash balance \$13,011.87

22 Problem 7 13 (concluded) To correct error in recording cash disbursement for rent: Cash Rent expense To record credits to cash revealed by the bank reconciliation: Interest expense Mortgage note payable Miscellaneous expense (bank service charges) Accounts receivable (NSF checks) Cash Requirement 3 Checking account balance \$13, Petty cash U.S. treasury bills 5, Total cash and cash equivalents \$18,211.87

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