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On July 1, 2014, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2015.
\r\nOn September 1, 2014, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2016.
\r\nMoresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers.
\r\nOn October 1, 2014, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.
\r\nOn November 1, 2014, other trade accounts receivable were sold on a without recourse basis. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.
\r\nInstructions
\r\n(a) How should Moresan determine the interest revenue for 2014 on the:
\r\n(1) Interest-bearing note receivable? Why?
\r\n(2) Zero-interest-bearing note receivable? Why?
\r\n(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2014?
\r\n(c) How should Moresan account for subsequent collections on the trade accounts receivable assigned on October 1, 2014, and the payments to Indigo Finance? Why?
\r\n(d) How should Moresan account for the trade accounts receivable factored on November 1, 2014?
\r\nWhy?
On September 30, 2013, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.
\r\nAfter receiving the first of two equal annual installments on September 30, 2014, Rolen immediately sold the note with recourse. On October 9, 2015, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.
\r\nInstructions
\r\n(a) (1) How should Rolen determine the sales price of the machine?
\r\n(2) How should Rolen report the effects of the zero-interest-bearing note on its income statement for the year ended December 31, 2013? Why is this accounting presentation appropriate?
\r\n(b) What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2014, and its balance sheet at December 31, 2014?
\r\n(c) How should Rolen account for the effects of the note being dishonored?
Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.
\r\nInstructions
\r\n(a) What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment?
\r\n(b) How should Corrs account for the sale, without recourse, of a February 1, 2014, note receivable sold on May 1, 2014? Why is it appropriate to account for it in this way?
\r\n(c) At December 31, 2014, how should Corrs measure and account for the impact of estimated losses resulting from notes receivable that it
\r\n(1) Retained and did not sell?
\r\n(2) Sold to bank with recourse?
On July 1, 2014, Wallace Company, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Wallace Company will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2015.
\r\nInstructions
\r\nWhen should Wallace Company report interest revenue from the note receivable? Discuss the rationale for your answer.
\r\nPart 2: On December 31, 2014, Wallace Company had significant amounts of accounts receivable as a result of credit sales to its customers. Wallace uses the allowance method based on credit sales to estimate bad debts. Past experience indicates that 2% of credit sales normally will not be collected. This pattern is expected to continue.
\r\nInstructions
\r\n(a) Discuss the rationale for using the allowance method based on credit sales to estimate bad debts.
\r\nContrast this method with the allowance method based on the balance in the trade receivables accounts.
\r\n(b) How should Wallace Company report the allowance for doubtful accounts on its balance sheet at
\r\nDecember 31, 2014? Also, describe the alternatives, if any, for presentation of bad debt expense in Wallace Company’s 2014 income statement.
Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt rate has been approximately 1½% of sales. In recent discussions with his bookkeeper, Mr. Pierce has become confused by all the alternatives apparently available in handling the Allowance for Doubtful
\r\nAccounts balance. The following information has been presented to Pierce.
\r\n1. An allowance can be set up (a) on the basis of a percentage of sales or (b) on the basis of a valuation of all past due or otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at the close of the accounting period, or specific items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year in which they are determined to be uncollectible.
\r\n2. Collection agency and legal fees, and so on, incurred in connection with the attempted recovery of
\r\nbad debts can be charged to (a) Bad Debt Expense, (b) Allowance for Doubtful Accounts, (c) Legal Expense, or (d) Administrative Expense.
\r\n3. Debts previously written off in whole or in part but currently recovered can be credited to (a) Other Revenue, (b) Bad Debt Expense, or (c) Allowance for Doubtful Accounts.
\r\nInstructions
\r\nWhich of the foregoing methods would you recommend to Mr. Pierce in regard to (1) allowances and charge-offs, (2) collection expenses, and (3) recoveries? State briefly and clearly the reasons supporting your recommendations.
Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers.
\r\nOn August 1, 2014, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.
\r\nKimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2014, and mature on September 30, 2016. Kimmel’s operating cycle is less than one year.
\r\nInstructions
\r\n(a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale?
\r\nWhat is the rationale for the amount recorded as sales under the net method?
\r\n(2) Using the net method, what is the effect on Kimmel’s sales revenues and net income when customers do not take the sales discounts?
\r\n(b) What is the effect of trade discounts on sales revenues and accounts receivable? Why?
\r\n(c) How should Kimmel account for the accounts receivable factored on August 1, 2014? Why?
\r\n(d) How should Kimmel account for the note receivable and the related interest on December 31, 2014?
\r\nWhy?
Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
\r\nInstructions
\r\n(a) What are the deficiencies of the direct write-off method?
\r\n(b) What are the two basic allowance methods used to estimate bad debts, and what is the theoretical justification for each?
\r\n(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?
On January 1, 2014, Botosan Company issued a $1,200,000, 5-year, zerointerest- bearing note to National Organization Bank. The note was issued to yield 8% annual interest.
\r\nUnfortunately, during 2015 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2015, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $800,000 of the principal at maturity.
\r\nInstructions
\r\n(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2014. (Round to the nearest $10.)
\r\n(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.
\r\n(c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired?
\r\n(d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on
\r\nDecember 31, 2015. What journal entries should be made to record this loss?
Presented below is information related to Haselhof Inc. Balance per books at October 31, $41,847.85; receipts $173,523.91; disbursements $164,893.54. Balance per bank statement November 30, $56,274.20.
\r\nThe following checks were outstanding at November 30.
\r\n1224 $1,635.29
\r\n1230 2,468.30
\r\n1232 2,125.15
\r\n1233 482.17
\r\nIncluded with the November bank statement and not recorded by the company were a bank debit memo for $27.40 covering bank charges for the month, a debit memo for $372.13 for a customer’s check returned and marked NSF, and a credit memo for $1,400 representing bond interest collected by the bank in the name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to $1,915.40.
\r\nInstructions
\r\n(a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the information above.
\r\n(b) Prepare any journal entries required to adjust the cash account at November 30.
The cash account of Aguilar Co. showed a ledger balance of $3,969.85 on June 30, 2014. The bank statement as of that date showed a balance of $4,150. Upon comparing the statement with the cash records, the following facts were determined.
\r\n1. There were bank service charges for June of $25.
\r\n2. A bank memo stated that Bao Dai’s note for $1,200 and interest of $36 had been collected on June 29, and the bank had made a charge of $5.50 on the collection. (No entry had been made on Aguilar’s books when Bao Dai’s note was sent to the bank for collection.)
\r\n3. Receipts for June 30 for $3,390 were not deposited until July 2.
\r\n4. Checks outstanding on June 30 totaled $2,136.05.
\r\n5. The bank had charged the Aguilar Co.’s account for a customer’s uncollectible check amounting to
\r\n$253.20 on June 29.
\r\n6. A customer’s check for $90 had been entered as $60 in the cash receipts journal by Aguilar on June 15.
\r\n7. Check no. 742 in the amount of $491 had been entered in the cash journal as $419, and check no. 747 in the amount of $58.20 had been entered as $582. Both checks had been issued to pay for purchases of equipment.
\r\nInstructions
\r\n(a) Prepare a bank reconciliation dated June 30, 2014, proceeding to a correct cash balance.
\r\n(b) Prepare any entries necessary to make the books correct and complete.
Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2014. He has collected the following information from Nottleman’s bookkeeper for this task.
\r\nPetty Cash
\r\n1. The petty cash fund was established on May 10, 2014, in the amount of $250.
\r\n2. Expenditures from the fund by the custodian as of May 31, 2014, were evidenced by approved receipts for the following.
\r\nPostage expense $33.00
\r\nMailing labels and other supplies 65.00
\r\nI.O.U. from employees 30.00
\r\nShipping charges (to customer) 57.45
\r\nNewspaper advertising 22.80
\r\nMiscellaneous expense 15.35
\r\nOn May 31, 2014, the petty cash fund was replenished and increased to $300; currency and coin in the fund at that time totaled $26.40.
\r\nProblems 399
\r\nBank Reconciliation
\r\n\r\n
Nottleman’s Cash Account
\r\nBalance, May 1, 2014 $ 8,850
\r\nDeposits during May 2014 31,000
\r\nChecks written during May 2014 (31,835)
\r\nDeposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand (besides petty cash) at May 31, 2014, is $246.
\r\nInstructions
\r\n(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.
\r\n(b) Prepare a bank reconciliation dated May 31, 2014, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete.
\r\n(c) What amount of cash should be reported in the May 31, 2014, balance sheet?
Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.
\r\n1. On July 1, 2014, Sandburg assigned $400,000 of accounts receivable to Keller Finance Company.
\r\nSandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2014, Sandburg collected $220,000 on the assigned accounts receivable, and remitted $232,720 to Keller, $12,720 of which represented interest on the advance from Keller.
\r\n2. On December 1, 2014, Sandburg sold $300,000 of net accounts receivable to Wunsch Company for $270,000. The receivables were sold outright on a without recourse basis.
\r\n3. On December 31, 2014, an advance of $120,000 was received from First Bank by pledging $160,000 of
\r\nSandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2015.
\r\nInstructions
\r\nPrepare a schedule showing the income statement effects for the year ended December 31, 2014, as a result of the above facts.
Braddock Inc. had the following long-term receivable account balances at December 31, 2013.
\r\nNote receivable from sale of division $1,500,000
\r\nNote receivable from offi cer 400,000
\r\nTransactions during 2014 and other information relating to Braddock’s long-term receivables were as follows.
\r\n1. The $1,500,000 note receivable is dated May 1, 2013, bears interest at 9%, and represents the balance of the consideration received from the sale of Braddock’s electronics division to New York Company.
\r\nPrincipal payments of $500,000 plus appropriate interest are due on May 1, 2014, 2015, and
\r\n2016. The first principal and interest payment was made on May 1, 2014. Collection of the note installments is reasonably assured.
\r\n2. The $400,000 note receivable is dated December 31, 2013, bears interest at 8%, and is due on December 31, 2016. The note is due from Sean May, president of Braddock Inc. and is collateralized by 10,000 shares of Braddock’s common stock. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2014. The quoted market price of Braddock’s common stock was $45 per share on December 31, 2014.
\r\n3. On April 1, 2014, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zerointerest- bearing note due on April 1, 2016. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2014, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of $40,000 at January 1, 2014, and the amortization for the year ended December 31, 2014, would have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured.
\r\n4. On July 1, 2014, Braddock sold a parcel of land to Splinter Company for $200,000 under an installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2014, and signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note will be $45,125 payable on July 1, 2015, through July 1, 2018. The land could have been sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are such that the collection of the installments on the note is reasonably assured.
\r\nInstructions
\r\n(a) Prepare the long-term receivables section of Braddock’s balance sheet at December 31, 2014.
\r\n(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would appear in Braddock’s balance sheet at December 31, 2014.
\r\n(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on
\r\nBraddock’s income statement for the year ended December 31, 2014.
On December 31, 2014, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of $102,049, accepting $40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest rate of 11% is imputed.
\r\nInstructions
\r\nPrepare the entries that would be recorded by Oakbrook Inc. for the sale and for the receipts and interest on the following dates. (Assume that the effective-interest method is used for amortization purposes.)
\r\n(a) December 31, 2014. (c) December 31, 2016. (e) December 31, 2018.
\r\n(b) December 31, 2015. (d) December 31, 2017.
On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year basis.
\r\nInstructions
\r\nAssuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.
Salen Company finances some of its current operations by assigning accounts receivable to a finance company. On July 1, 2014, it assigned, under guarantee, specific accounts amounting to $150,000. The finance company advanced to Salen 80% of the accounts assigned (20% of the total to be withheld until the finance company has made its full recovery), less a finance charge of ½% of the total accounts assigned.
\r\nOn July 31, Salen Company received a statement that the finance company had collected $80,000 of these accounts and had made an additional charge of ½% of the total accounts outstanding as of July 31.
\r\nThis charge is to be deducted at the time of the first remittance due Salen Company from the finance company. (Hint: Make entries at this time.) On August 31, 2014, Salen Company received a second statement from the finance company, together with a check for the amount due. The statement indicated that the finance company had collected an additional $50,000 and had made a further charge of ½% of the balance outstanding as of August 31.
\r\nInstructions
\r\nMake all entries on the books of Salen Company that are involved in the transactions above.
The balance sheet of Starsky Company at
\r\nDecember 31, 2013, includes the following.
\r\nNotes receivable $ 36,000
\r\nAccounts receivable 182,100
\r\nLess: Allowance for doubtful accounts 17,300 $200,800 Transactions in 2014 include the following.
\r\n1. Accounts receivable of $138,000 were collected including accounts of $60,000 on which 2% sales discounts were allowed.
\r\n2. $5,300 was received in payment of an account which was written off the books as worthless in 2013.
\r\n3. Customer accounts of $17,500 were written off during the year.
\r\n4. At year-end, Allowance for Doubtful Accounts was estimated to need a balance of $20,000. This estimate is based on an analysis of aged accounts receivable.
\r\nInstructions
\r\nPrepare all journal entries necessary to reflect the transactions above.
Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2014.
\r\n1. An aging schedule of the accounts receivable as of December 31, 2014, is as follows.
\r\n% to Be Applied after
\r\nAge Net Debit Balance Correction Is Made
\r\nUnder 60 days $172,342 1%
\r\n60–90 days 136,490 3%
\r\n91–120 days 39,924* 6%
\r\nOver 120 days 23,644 $3,700 defi nitely uncollectible;
\r\n$372,400 estimated remainder uncollectible is 25%
\r\n*The $3,240 write-off of receivables is related to the 91-to-120 day category.
\r\n2. The Accounts Receivable control account has a debit balance of $372,400 on December 31, 2014.
\r\n3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December
\r\n31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for $3,240 on November 3, 2014, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.
\r\n4. Allowance for Doubtful Accounts is as follows for 2014.
\r\n\r\n
5. A credit balance exists in Accounts Receivable (60–90 days) of $4,840, which represents an advance on a sales contract.
\r\nInstructions
\r\nAssuming that the books have not been closed for 2014, make the necessary correcting entries
From inception of operations to December 31, 2014, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. Provisions were made monthly at
\r\n2% of credit sales, bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2014, and an aging of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the aging is as follows.
\r\nClassifi cation by Balance in Estimated %
\r\nMonth of Sale Each Category Uncollectible
\r\nNovember–December 2014 $1,080,000 2%
\r\nJuly–October 650,000 10%
\r\nJanuary–June 420,000 25%
\r\nPrior to 1/1/14 150,000 80%
\r\n$2,300,000
\r\nBased on the review of collectibility of the account balances in the “prior to 1/1/14” aging category, additional receivables totaling $60,000 were written off as of December 31, 2014. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2014, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.
\r\nInstructions
\r\n(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended
\r\nDecember 31, 2014. Show supporting computations in good form. (Hint: In computing the 12/31/14 allowance, subtract the $60,000 write-off.)
\r\n(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2014.
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.
\r\nProbability of
\r\nDays Account Outstanding Amount Collection
\r\nLess than 16 days $300,000 .98
\r\nBetween 16 and 30 days 100,000 .90
\r\nBetween 31 and 45 days 80,000 .85
\r\nBetween 46 and 60 days 40,000 .80
\r\nBetween 61 and 75 days 20,000 .55
\r\nOver 75 days 15,000 .00
\r\nInstructions
\r\n(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
\r\n(b) Show how accounts receivable would be presented on the balance sheet.
\r\n(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
The following are a series of unrelated situations.
\r\n1. Halen Company’s unadjusted trial balance at December 31, 2014, included the following accounts. Debit Credit
\r\nAllowance for doubtful accounts $4,000
\r\nNet sales $1,200,000
\r\nHalen Company estimates its bad debt expense to be 1½% of net sales. Determine its bad debt expense for 2014.
\r\n2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2014, disclosed the following.
\r\nAmounts estimated to be uncollectible $ 180,000
\r\nAccounts receivable 1,750,000
\r\nAllowance for doubtful accounts (per books) 125,000
\r\nWhat is the net realizable value of Stuart’s receivables at December 31, 2014?
\r\n3. Shore Co. provides for doubtful accounts based on 3% of credit sales. The following data are available for 2014.
\r\nCredit sales during 2014 $2,400,000
\r\nAllowance for doubtful accounts 1/1/14 17,000
\r\nCollection of accounts written off in prior years (customer credit was reestablished) 8,000
\r\nCustomer accounts written off as uncollectible during 2014 30,000
\r\nWhat is the balance in Allowance for Doubtful Accounts at December 31, 2014?
\r\n4. At the end of its first year of operations, December 31, 2014, Darden Inc. reported the following information.
\r\nAccounts receivable, net of allowance for doubtful accounts $950,000
\r\nCustomer accounts written off as uncollectible during 2014 24,000
\r\nBad debt expense for 2014 84,000
\r\nWhat should be the balance in accounts receivable at December 31, 2014, before subtracting the allowance for doubtful accounts?
\r\n5. The following accounts were taken from Bullock Inc.’s trial balance at December 31, 2014.
\r\nInstructions
\r\n(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
\r\n(b) Show how accounts receivable would be presented on the balance sheet.
\r\n(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
\r\n(CMA adapted)
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.
\r\n1. January cash receipts recorded in the December cash book totaled $45,640, of which $28,000 represents cash sales, and $17,640 represents collections on account for which cash discounts of $360 were given.
\r\n2. January cash disbursements recorded in the December check register liquidated accounts payable of $22,450 on which discounts of $250 were taken.
\r\n3. The ledger has not been closed for 2014.
\r\n4. The amount shown as inventory was determined by physical count on December 31, 2014.
\r\nThe company uses the periodic method of inventory.
\r\nInstructions
\r\n(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.
\r\n(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December
\r\n31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amountsZOBLEMS
\r\nSee the book’s companion website, at www.wiley.com/college/kieso, for an additional
\r\nset of exercises.XERCISES SET B
\r\nDr. Cr.
\r\nCash $39,000
\r\nAccounts receivable 42,000
\r\nInventory 67,000
\r\nAccounts payable $45,000
\r\nOther current liabilities 14,200
On December 31, 2014, Conchita Martinez Company signed a $1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2016, Sauk City Bank determined that it was probable that the company would pay back only $600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.
\r\nInstructions
\r\n(a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2014.
\r\n(b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2016.
\r\n(c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2016.
On December 31, 2014, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2016, Majoli began to experience financial difficulty. As a result, at December 31, 2016, Paris
\r\nBank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
\r\nInstructions
\r\n(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2014.
\r\n(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2016, by Paris Bank.
Logan Bruno Company has just received the August
\r\n31, 2014, bank statement, which is summarized below.
\r\n\r\n
The general ledger Cash account contained the following entries for the month of August.
\r\nCash Balance, August 1 10,050 Disbursements in August 34,903
\r\nReceipts during August 35,000
\r\nDeposits in transit at August 31 are $3,800, and checks outstanding at August 31 total $1,050. Cash on hand at August 31 is $310. The bookkeeper improperly entered one check in the books at $146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.
\r\nInstructions
\r\n(a) Prepare a bank reconciliation dated August 31, 2014, proceeding to a correct balance.
\r\n(b) Prepare any entries necessary to make the books correct and complete.
\r\n(c) What amount of cash should be reported in the August 31 balance sheet?
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