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 (LO2) (Recording Sales Gross and Net) On June 3, Bolton plc sold to
Arquette Company merchandise having a sales price of £2,000 with terms
of 2/10, n/60. An invoice totaling £90, terms n/30, was received by Arquette
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 Arquette
Company.
Instructions

a. Prepare journal entries on the Bolton plc books to record sales and
receivables 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 (a)(2), assuming that Arquette
Company did not remit payment until July 29.
E7.6 (LO2) (Recording Sales Transactions) Presented below is information
from Lopez Computers.
July Sold R$30,000 of computers to Smallwood Company with terms 3/15,
1 n/60. Lopez uses the gross method to record cash discounts.
10 Lopez received payment from Smallwood for the full amount owed from
the July transactions.
17 Sold R$250,000 in computers and peripherals to The Hernandez Store
with terms of 2/10, n/30.
30 The Hernandez Store paid Lopez for its purchase of July 17.
Instructions

Prepare the necessary journal entries for Lopez Computers.

E7.7 (LO3) (Recording Bad Debts) Duncan SA 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
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 (LO3) (Recording Bad Debts) At the end of 2019, Sorter plc has
accounts receivable of £900,000 and an allowance for doubtful accounts of
£40,000. On January 16, 2020, Sorter determined that its receivable from
Ordonez Orchards £8,000 will not be collected, and management
authorized its write-off.
Instructions

a. Prepare the journal entry for Sorter plc to write off the Ordonez
receivable.
b. What is the cash realizable value of Sorter plc's accounts receivable
before the write-off of the Ordonez receivable?
c. What is the cash realizable value of Sorter plc's accounts receivable
after the write-off of the Ordonez receivable?
E7.9 (LO3) (Computing Bad Debts and Preparing Journal Entries) The
trial balance before adjustment of Estefan Inc. shows the following
balances.
Dr. Cr.
Accounts Receivable $80,000
Allowance for Doubtful Accounts 1,750
Sales Revenue (net, all on credit) $580,000
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 receivables and allowance for
Doubtful accounts has a $1,700 credit balance.
E7.10 (LO3) (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 9,700
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 tax authority 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 (LO3) (Bad Debts—Aging) Puckett, AG includes the following account
among its trade receivables.
Alstott Co.
1/1 Balance forward 7001/28 Cash (#1710) 1,100
1/20 Invoice #1710 1,1004/2 Cash (#2116) 1,350
3/14 Invoice #2116 1,3504/10 Cash (1/1 Balance) 255
4/12 Invoice #2412 1,7104/30 Cash (#2412) 1,000
9/5 Invoice #3614 4909/20 Cash (#3614 and part of #2412) 890
10/17 Invoice #4912 860
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 (LO2, 3, 5) (Journalizing Various Receivable Transactions)?
Presented below is information related to Sanford SA.

July 1 Sanford SA sold to Legler Co. merchandise having a sales price of

€10,000 with terms 2/10, net/60. Sanford records its sales and
receivables net.
5 Accounts receivable of €12,000 (gross) are factored with Rothchild
Credit Corp. without guarantee 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
Rather 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 Legler Co. notifies Sanford 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.)
31 Sanford conducts an individual assessment of a note receivable
with a carrying value of €350,000. Sanford determines the present
value of the note is €275,000.
Instructions

Prepare all necessary entries in general journal form for Sanford SA.
E7.13 (LO4) (Notes Transactions at Unrealistic Interest Rates) On July 1,
2019, Rentoul plc made two sales.
1. It sold land having a fair value of £900,000 in exchange for a 4-year,
zero-interest-bearing promissory note in the face amount of
£1,416,163. The land is carried on Rentoul'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).
Rentoul 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 Rentoul plc for the
sales transactions above that took place on July 1, 2019.
E7.14 (LO4) (Notes Receivable with Unrealistic Interest Rate) On
December 31, 2019, Hurly Co. performed environmental consulting services
for Cascade Co. Cascade was short of cash, and Hurly Co. agreed to
accept a $300,000 zero-interest-bearing note due December 31, 2021, as
payment in full. Cascade is somewhat of a credit risk and typically borrows
funds at a rate of 10%. Hurly 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,

2019, for Hurly Co.
b. Assuming Hurly Co.'s fiscal year-end is December 31, prepare the
journal entry for December 31, 2020.
c. Assuming Hurly Co.'s fiscal year-end is December 31, prepare the
journal entry for December 31, 2021.
E7.15 (LO5) (Assigning Accounts Receivable) On April 1, 2019, Prince
Company assigns $500,000 of its accounts receivable to the Hibernia Bank
as collateral for a $300,000 loan due July 1, 2019. The assignment
agreement calls for Prince Company to continue to collect the receivables.
Hibernia 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, 2019, journal entry for Prince Company.

b. Prepare the journal entry for Prince's collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through June
30, 2019.
c. On July 1, 2019, Prince paid Hibernia all that was due from the loan it
 secured on April 1, 2019. Prepare the journal entry to record this
payment.
E7.16 (LO5) (Journalizing Various Receivable Transactions) The trial
balance before adjustment for Misumi Ltd. shows the following balances
(amounts in thousands).
Dr. Cr.
Accounts Receivable ¥82,000
Allowance for Doubtful Accounts 1,750
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, Misumi factors without guarantee of credit
loss ¥20,000 of accounts receivable with Stills Finance. The finance
charge is 10% of the amount factored.
2. To obtain a one-year loan of ¥ 55,000, Misumi assigns ¥ 65,000 of
specific receivable accounts to Obihiro Financial. The finance charge is
8% of the loan; the cash is received and the accounts turned over to
Obihiro Financial.
3. The company wants to maintain 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.
E7.17 (LO5) (Transfer of Receivables with Guarantee) Bryant Ltd. factors
receivables with a carrying amount of £200,000 to Warren Company for
£190,000 and guarantees all credit losses.
Instructions

Prepare the appropriate journal entry to record this transaction on the books
of Bryant Ltd.
E7.18 (LO5) (Transfer of Receivables without Guarantee) Bohannon SA
factors €250,000 of accounts receivable with Winkler Financing, Inc. on a
without guarantee (no recourse) basis. Winkler Financing will collect the
receivables. The receivables records are transferred to Winkler Financing
 on August 15, 2019. Winkler Financing assesses a finance charge of 2% of
the amount of accounts receivable and also reserves an amount equal to
4% of accounts receivable to cover probable adjustments.
Instructions

a. What conditions must be met for a transfer of receivables with

guarantee to be accounted for as a sale?
b. Assume the conditions from part (a) are met. Prepare the journal entry
on August 15, 2019, for Bohannon to record the sale of receivables.
E7.19 (LO5) (Transfer of Receivables without Guarantee) SEK Group
factors ¥400,000 of accounts receivable with Mays Finance Corporation,
without guaranteeing any payment for possible credit losses (without
recourse) on July 1, 2019. The receivables records are transferred to Mays
Finance, which will receive the collections. Mays Finance assesses a
finance charge of 1½% of the amount of accounts receivable and retains an
amount equal to 4% of accounts receivable to cover sales discounts,
returns, and allowances. The transaction is to be recorded as a sale.
Instructions

a. Prepare the journal entry on July 1, 2019, for SEK Group to record the
sale of receivables without recourse.
b. Prepare the journal entry on July 1, 2019, for Mays Finance to record
the purchase of receivables without recourse.
E7.20 (LO5, 6) (Analysis of Receivables) Presented below is information for
Grant AG.
1. Beginning-of-the-year Accounts Receivable balance was €15,000.
2. Net sales (all on account) for the year were €100,000. Grant does not
offer cash discounts.
3. Collections on accounts receivable during the year were €80,000.
Instructions

a. Prepare (summary) journal entries to record the items noted above.

b. Compute Grant's accounts receivable turnover for the year. The
company does not believe it will have any bad debts.
c. Use the turnover ratio computed in (b) to analyze Grant's liquidity. The
turnover ratio last year was 7.0.
E7.21 (LO5) (Transfer of Receivables) Use the information for Grant AG as
presented in E7.20. Grant is planning to factor some accounts receivable at
the end of the year. Accounts totaling €10,000 will be transferred to Credit
Factors Inc. without guarantee. Credit Factors will retain 5% of the balances
for probable adjustments and assesses a finance charge of 4%.
Instructions

a. Prepare the journal entry to record the sale of the receivables.

b. Compute Grant's accounts receivable turnover for the year, assuming
the receivables are sold. Discuss how factoring of receivables affects
the turnover ratio.
*E7.22 (LO6) (Petty Cash) McMann, Inc. decided to establish a petty cash
fund to help ensure internal control over its small cash expenditures. The
following information is available for the month of April.
1. On April 1, it established a petty cash fund in the amount of $200.
2. A summary of the petty cash expenditures made by the petty cash
custodian as of April 10 is as follows.

Delivery charges paid on merchandise purchased $60

Supplies purchased and used 25
Postage expense 40
I.O.U. from employees 17
Miscellaneous expense 36
The petty cash fund was replenished on April 10. The balance in the fund
was $12.
3. The petty cash fund balance was increased $100 to $300 on April 20.
Instructions

Prepare the journal entries to record transactions related to petty cash for the
month of April.
*E7.23 (LO6) (Petty Cash) The petty cash fund of Teasdale's Auto Repair
Service, a sole proprietorship, contains the following.

1. Coins and currency $ 10.20

2. Postage stamps 7.90
3. An I.O.U. from Richie Cunningham, an employee, for 40.00
cash advance
4. Check payable to Teasdale's Auto Repair from Pottsie 34.00
Weber, an employee, marked NSF
5. Vouchers for the following:
Stamps $
20.00
Two Premier Cup tickets for Nick Teasdale 170.00
Printer cleaning 204.35
14.35
$296.45

The general ledger account Petty Cash has a balance of $300.

Instructions

Prepare the journal entry to record the reimbursement of the petty cash fund.
*E7.24 (LO6) (Bank Reconciliation and Adjusting Entries) Kipling plc
deposits all receipts and makes all payments by check. The following
information is available from the cash records.
June 30 Bank Reconciliation
Balance per bank £7,000
Add: Deposits in transit 1,540
Deduct: Outstanding checks 2,000
Balance per books £6,540
Month of July Results
Per Per
Bank Books
Balance July 31 £8,650 £9,250
July deposits 4,500 5,810
July checks 4,000 3,100
July note collected (not included in July deposits) 1,500 —
July bank service charge —
15
July NSF check from a customer, returned by the bank —
(recorded by bank as a charge) 335
Instructions

a. Prepare a bank reconciliation going from balance per bank and

balance per book to correct the cash balance.
b. Prepare the general journal entry or entries to correct the Cash
account.
*E7.25 (LO6) (Bank Reconciliation and Adjusting Entries) Aragon
Company has just received the August 31, 2019, bank statement, which is
summarized below.
County National Bank Disbursements Receipts Balance
Balance, August 1 $ 9,369
Deposits during August $32,200 41,569
Note collected for depositor, including 1,040 42,609
$40 interest
Checks cleared during August $34,500 8,109
Bank service charges 20 8,089
Balance, August 31 8,089
The general ledger Cash account contained the following entries for the
month of August.

Cash
Balance, August 1 10,050 Disbursements in August 35,403
Receipts during August 35,000
Deposits in transit at August 31 are $3,800, and checks outstanding at August
31 total $1,550. 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.
Instructions

a. Prepare a bank reconciliation dated August 31, 2019, proceeding to a

correct balance.
b. Prepare any entries necessary to make the books correct and
 complete.
c. What amount of cash should be reported in the August 31 statement of
financial position?

Problems

P7.1 (LO1) (Determine Proper Cash Balance) Francis Equipment AG closes

its books regularly on December 31, but at the end of 2019 it held its cash
book open so that a more favorable statement of financial position 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.
1. 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.
2. January cash disbursements recorded in the December check register
liquidated accounts payable of €22,450 on which discounts of €250
were taken.
3. The ledger has not been closed for 2019.
4. The amount shown as inventory was determined by physical count on
December 31, 2019.
The company uses the periodic method of inventory.
Instructions

a. Prepare any entries you consider necessary to correct Francis's

accounts at December 31.
b. To what extent was Francis Equipment AG able to show a more
favorable statement of financial position at December 31 by holding its
cash book open? (Compute working capital and the current ratio.)
Assume that the statement of financial position that was prepared by
the company showed the following amounts:
Dr. Cr.
Cash €39,000
Accounts receivable 42,000
Inventory 67,000
 Accounts payable €45,000
Other current liabilities 14,200

P7.2 (LO3) (Bad-Debt Reporting) The following are a series of

unrelated situations.
1. Halen Company's unadjusted trial balance at December 31, 2019,
included the following accounts.
Debit Credit
Accounts receivable $53,000
Allowance for doubtful accounts 4,000
Net sales $1,200,000

Halen Company estimates its bad debt expense to be 7% of gross

accounts receivable. Determine its bad debt expense for 2019.
2. An analysis and aging of Stuart Corp. accounts receivable at
December 31, 2019, disclosed the following.
Amounts estimated to be uncollectible $ 180,000
Accounts receivable 1,750,000
Allowance for doubtful accounts (per books) 125,000

What is the cash realizable value of Stuart's receivables at December 31,

2019?
3. Shore Co. provides for doubtful accounts based on 4% of gross
accounts receivable, which had a balance of $1,500,000 at year-end.
The following data are available for 2019.
Credit sales during 2019 $4,400,000
Allowance for doubtful accounts 1/1/19 17,000
Collection of accounts written off in prior years (customer 8,000
credit was reestablished)
Customer accounts written off as uncollectible during 2019 30,000
What is the balance in Allowance for Doubtful Accounts at December 31,
2019?
4. At the end of its first year of operations, December 31, 2019, Darden
Inc. reported the following information.
 Accounts receivable, net of allowance for doubtful accounts $950,000
Customer accounts written off as uncollectible during 2019 24,000
Bad debt expense for 2019 84,000

What should be the balance in accounts receivable at December 31,

2019, before subtracting the allowance for doubtful accounts?
5. The following accounts were taken from Bullock Inc.'s trial balance at
December 31, 2019.
Debit Credit
Net credit sales $750,000
Allowance for doubtful accounts $ 14,000
Accounts receivable 310,000

If doubtful accounts are 3% of accounts receivable, determine the bad

debt expense to be reported for 2019.
Instructions

Answer the questions relating to each of the five independent situations as

requested.
P7.3 (LO3) (Bad-Debt Reporting—Aging) 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 was $555,000
and Allowance for Doubtful Accounts had a credit balance of $40,000. The
year-end balance reported in the statement of financial position for
Allowance for Doubtful Accounts will be based on the aging schedule
shown below.
Days Account Outstanding Amount Probability of Collection
Less than 16 days $300,000 .98
16–30 days 100,000 .90
31–45 days 80,000 .85
46–60 days 40,000 .80
61–75 days 20,000 .55
Over 75 days 15,000 .00

Instructions
 a. What is the appropriate balance for Allowance for Doubtful Accounts at
year-end?
b. Show how accounts receivable would be presented on the statement
of financial position.
c. What is the dollar effect of the year-end bad debt adjustment on the
before-tax income?
P7.4 (LO3) (Bad-Debt Reporting) From inception of operations to December
31, 2019, Fortner plc provided for uncollectible accounts receivable under
the allowance method. The provisions are recorded based on analysis of
customers with diff erent risk characteristics. 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,
2019. During 2019, credit sales totaled £9,000,000, the provision for doubtful
accounts was determined to be £180,000, £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 2019, and an aging of
accounts receivable was prepared for the first time as of December 31, 2019.
A summary of the aging is as follows.

Classification by Month of Balance in Each Estimated %

Sale Category Uncollectible
November–December 2019 £1,080,000 2%
July–October 650,000 10%
January–June 420,000 25%
Prior to 1/1/19 150,000 80%
£2,300,000

Based on the review of collectibility of the account balances in the “prior to

1/1/19” aging category, additional receivables totaling £60,000 were written off
as of December 31, 2019. The 80% uncollectible estimate applies to the
remaining £90,000 in the category. Effective with the year ended December
31, 2019, 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.
Instructions

a. Prepare a schedule analyzing the changes in Allowance for Doubtful

Accounts for the year ended December 31, 2019. Show supporting
computations in good form.
(Hint: In computing the 12/31/19 allowance, subtract the £60,000 write-
off.)
b. Prepare the journal entry for the year-end adjustment to the Allowance
for Doubtful Accounts balance as of December 31, 2019.
P7.5 (LO3) (Bad-Debt Reporting) The following is information related to the
Accounts Receivable accounts of Gulistan AG during the current year 2019.
1. An aging schedule of the accounts receivable as of December 31,
2019, is as follows.

Age Net Debit % to Be Applied after Correction Is Made

Balance
Under 60 €172,342 1%
days
60–90 136,490 3%
days
91–120 39,924* 6%
days
Over 120 23,644 €3,700 definitely uncollectible; estimated
days remainder uncollectible is 25%
€372,400
* The €3,240 write-off of receivables is related to the 91-to-120 day category.

2. The Accounts Receivable account has a debit balance of €372,400 on

December 31, 2019.
3. Two entries were made in the Bad Debt Expense account during the
year: (1) a debit on December 31 for the amount credited to Allowance
for Doubtful Accounts, and (2) a credit for €3,240 on November 3,
2019, and a debit to Allowance for Doubtful Accounts because of a
bankruptcy.
4. Allowance for Doubtful Accounts is as follows for 2019.
Allowance for Doubtful Accounts
 Nov. 3 Uncollectible accounts Jan. 1 Beginning balance 8,750
written off 3,240 Dec. 31 5% of €372,400 18,620
5. A credit balance exists in Accounts Receivable (60–90 days) of €4,840,
which represents an advance on a sales contract.
Instructions

Assuming that the books have not been closed for 2019, make the necessary
correcting entries.
P7.6 (LO2, 3) (Journalize Various Accounts Receivable Transactions) The
statement of financial position of Stancia SA at December 31, 2018,
includes the following (in thousands).

Notes receivable R$ 36,000

Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300 R$200,800
Transactions in 2019 include the following.
1. Accounts receivable of R$138,000 were collected including accounts of
R$60,000 on which 2% sales discounts were allowed.
2. R$5,300 was received in payment of an account which was written off
the books as worthless in 2019. (Hint: Reestablish the receivable
account.)
3. Customer accounts of R$17,500 were written off during the year.
4. At year-end, Allowance for Doubtful Accounts was estimated to need a
balance of R$20,000. This estimate is based on an analysis of aged
accounts receivable.
Instructions

Prepare all journal entries necessary to reflect the transactions above.

P7.7 (LO4) (Notes Receivable with Realistic Interest Rate) On October 1,
2019, Arden Farm Equipment Company sold a pecan-harvesting machine
to Valco Brothers Farm. 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.
Instructions