7 Cash and Receivables EXERCISES 7.1
EXERCISES
E7-1 (L01) EXCEL (Determining Cash Balance) The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.
1. Commercial savings account of $600,000 and a commercial checking account balance of $900,000 are held at First National Bank of Yojimbo.
2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, $5,000,000.
3. Travel advances of $180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).
4. A separate cash fund in the amount of $1,500,000 is restricted for the retirement of long-term debt.
5. Petty cash fund of $1,000.
6. An I.O.U. from Marianne Koch, a company customer, in the amount of $190,000.
7. A bank overdraft of $110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.
8. The company has two certificates of deposit, each totaling $500,000. These CDs have a maturity of 120 days.
9. Eastwood has received a check that is dated January 12, 2018, in the amount of $125,000.
10. Eastwood has agreed to maintain a cash balance of $500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.
11. Eastwood has purchased $2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.
12. Currency and coin on hand amounted to $7,700.
Instructions
(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.
(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.
E7-2 (L01) (Determining Cash Balance) Presented below are a number of independent situations.
Instructions
For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.
1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180.
2. Checking account balance $600,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350.
3. Checking account balance $590,000; postdated check from customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620.
4. Checking account balance at bank $37,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800.
5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.
E7-3 (L02) (Financial Statement Presentation of Receivables) Jim Carrie Company shows a balance of $181,140 in the
Accounts Receivable account on December 31, 2017. The balance consists of the following.
Installment accounts due in 2018 $23,000
Installment accounts due after 2018 34,000
Overpayments to vendors 2,640
Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan 79,000
Advances to employees 1,500
Advance to subsidiary company (due in 2018) 81,000
Instructions
Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2017.
E7-4 (L02) (Determining Ending Accounts Receivable) Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of $1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of $82,000 as shown in the ledger.
The following information is available for your first year in business.
(1) Collections from customers $198,000
(2) Merchandise purchased 320,000
(3) Ending merchandise inventory 90,000
(4) Goods are marked to sell at 40% above cost
Instructions
Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account.
E7-5 (L02) EXCEL (Recording Sales Gross and Net) On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth 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.
(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.
E7-6 (L02) (Recording Sales Transactions) Presented below is information from Perez Computers Incorporated.
July 1 Sold $20,000 of computers to Robertson Company with terms 3/15, n/60. Perez uses the gross method to record cash discounts. Perez estimates allowances of $1,300 will be honored on these sales.
10 Perez received payment from Robertson for the full amount owed from the July transactions.
17 Sold $200,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.
30 The Clark Store paid Perez for its purchase of July 17.
Instructions
Prepare the necessary journal entries for Perez Computers.
E7-7 (L03) (Recording Bad Debts) Duncan Company reports the following financial information before adjustments.
Dr. Cr.
Accounts Receivable $100,000
Allowance for Doubtful Accounts $ 2,000
Sales Revenue (all on credit) 900,000
Sales Returns and Allowances 50,000
Instructions
Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.
E7-8 (L03) (Recording Bad Debts) At the end of 2017, Aramis Company has accounts receivable of $800,000 and an allowance for doubtful accounts of $40,000. On January 16, 2018, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.
Instructions
(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.
(b) What is the net realizable value of Aramis Company’s accounts receivable before the write-off of the Ramirez receivable?
(c) What is the net realizable value of Aramis Company’s accounts receivable after the write-off of the Ramirez receivable?
E7-9 (L03) (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Taylor Swift Inc. shows the following balances.
Dr. Cr.
Accounts Receivable $90,000
Allowance for Doubtful Accounts 1,750
Sales Revenue (all on credit) $680,000
Instructions
Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,700 credit balance.
E7-10 (L03) (Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.
Date Customer Amount
March 31 E. L. Masters Company $7,800
June 30 Stephen Crane Associates 6,700
September 30 Amy Lowell’s Dress Shop 7,000
December 31 R. Frost, Inc. 9,830
Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.
All of Dickinson’s sales are on a 30-day credit basis. Sales for the current year total $2,200,000. The balance in Accounts
Receivable at year-end is $77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).
Instructions
(a) Do you agree or disagree with Dickinson’s policy concerning recognition of bad debt expense? Why or why not?
(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?
E7-11 (L03) (Bad Debts—Aging) Danica Patrick, Inc. includes the following account among its trade receivables.
Hopkins Co.
1/1 Balance forward 700 1/28 Cash (#1710) 1,100
1/20 Invoice #1710 1,100 4/2 Cash (#2116) 1,350
3/14 Invoice #2116 1,350 4/10 Cash (1/1 Balance) 155
4/12 Invoice #2412 1,710 4/30 Cash (#2412) 1,000
9/5 Invoice #3614 490 9/20 Cash (#3614 and
10/17 Invoice #4912 860 part of #2412) 790
11/18 Invoice #5681 2,000 10/31 Cash (#4912) 860
12/20 Invoice #6347 800 12/1 Cash (#5681) 1,250
12/29 Cash (#6347) 800
Instructions
Age the balance and specify any items that apparently require particular attention at year-end.
E7-12 (L02,3,6) (Journalizing Various Receivable Transactions) Presented below is information related to James Garfield Corp., which sells merchandise with terms 2/10, net 60. Garfield records its sales and receivables net.
July 1 James Garfield Corp. sold to Warren Harding Co. merchandise having a sales price of $8,000.
5 Accounts receivable of $9,000 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a financing charge of 9%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.)
9 Specific accounts receivable of $9,000 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of $6,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.)
Dec. 29 Warren Harding Co. notifies Garfield that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)
Instructions
Prepare all necessary entries in general journal form for Garfield Corp.
E7-13 (L04) (Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.
1. It sold land having a fair value of $700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,101,460. The land is carried on Agincourt’s books at a cost of $590,000.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000 (interest payable annually).
Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
Instructions
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.
E7-14 (L04,6) (Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest- bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.
Instructions
(a) Prepare the journal entry to record the transaction of December 31, 2015, for the Ed Abbey Co.
(b) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.
(c) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017.
E7-15 (L06) (Assigning Accounts Receivable) On April 1, 2017, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).
Instructions
(a) Prepare the April 1, 2017, journal entry for Rasheed Company.
(b) Prepare the journal entry for Rasheed’s collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.
(c) On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.
E7-16 (L02,3,6) (Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.
Dr. Cr.
Accounts Receivable $82,000
Allowance for Doubtful Accounts 2,120
Sales Revenue $430,000
Instructions
Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)
1. To obtain additional cash, Collins factors without recourse $25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.
2. To obtain a 1-year loan of $55,000, Collins pledges $65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.
3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.
4. Based on an aging analysis, an allowance of $5,800 should be reported. Assume the allowance has a credit balance of $1,100.
