Scribd
Upload
53 views

Chapter 7 Suggested Questions and Problems (1) - Tagged

Uploaded by

kero.eshak20
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
53 views

Chapter 7 Suggested Questions and Problems (1) - Tagged

Uploaded by

kero.eshak20
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

CHAPTER 7 SUGGESTED QUESTIONS & PROBLEMS

QUESTIONS:
Q9. What is the theoretical justification of the allowance method as contrasted with the direct
write-off method of accounting for bad debts?
Q12. Explain how the accounting for bad debts can be used for earnings management.

BRIEF EXERCISES:
BE7.10 (LO 5) Wood Incorporated factored $150,000 of accounts receivable with
Engram Factors Inc. on a without-recourse basis. Engram assesses a 2% finance charge
of the amount of accounts receivable and retains an amount equal to 6% of accounts
receivable for possible adjustments. Prepare the journal entry for Wood Incorporated
and Engram Factors to record the factoring of the accounts receivable to Engram.

BE7.11 (LO 5) Use the information in BE7.10 for Wood. Assume that the receivables
are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming
that the recourse liability has a fair value of $7,500.

EXERCISES:

E7.5 (LO 2) (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.

E7.8 (LO 3) (Recording Bad Debts) At the end of 2020, Aramis Company has
accounts receivable of $800,000 and an allowance for doubtful accounts of $40,000.
On January 16, 2021, 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 amount expected to be collected of Aramis Company’s accounts
receivable before the write-off of the Ramirez receivable?

1
c. What is the net amount expected to be collected of Aramis Company’s accounts
receivable after the write-off of the Ramirez receivable?

E7.13 (LO 4) (Note Transactions at Unrealistic Interest Rates) On July


1, 2020, 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, 2020.
E7.19 (LO 5) (Transfer of Receivables without Recourse) JFK Corp.
factors $300,000 of accounts receivable with LBJ Finance Corporation on a without
recourse basis on July 1, 2020. The receivables records are transferred to LBJ Finance,
which will receive the collections. LBJ 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, 2020, for JFK Corp. to record the sale of
receivables without recourse.
b. Prepare the journal entry on July 1, 2020, for LBJ Finance Corporation to record
the purchase of receivables without recourse.

PROBLEMS:

P7.2 (LO 3) (Bad-Debt Reporting) The following are a series of unrelated


situations.
1. Halen Company’s unadjusted trial balance at December 31, 2020, included the
following accounts.
Debit Credit

Accounts receivable $53,000


Allowance for doubtful 4,000
accounts

2
Debit Credit

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 2020.
2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2020,
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 net amount expected to be collected of Stuart’s receivables at December 31,
2020?
3. Shore Co. provides for doubtful accounts based on 4% of gross accounts receivable,
The following data are available for 2020.
Credit sales during 2020 $4,400,000
Bad debt expense 57,000
Allowance for doubtful accounts 1/1/20 17,000
Collection of accounts written off in prior years
(customer credit was reestablished) 8,000
Customer accounts written off as uncollectible
during 2020 30,000
What is the balance in Allowance for Doubtful Accounts at December 31, 2020?
4. At the end of its first year of operations, December 31, 2020, Darden Inc. reported
the following information.
Accounts receivable, net of allowance for doubtful accounts $950,000
Customer accounts written off as uncollectible during 2020 24,000
Bad debt expense for 2020 84,000
What should be the balance in accounts receivable at December 31, 2020, before
subtracting the allowance for doubtful accounts?
5. The following accounts were taken from Bullock Inc.’s trial balance at December
31, 2020.
Debit Credit

Net credit sales $750,000


Allowance for doubtful accounts $
14,000

3
Debit Credit

Accounts receivable 310,000


If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to
be reported for 2020.

4
P7.6 (LO 2, 3) (Journalize Various Accounts Receivable
Transactions) The balance sheet of Starsky Company at December 31, 2019, includes
the following.
Notes receivable $ 36,000
Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300 $200,800
Transactions in 2020 include the following.
1. Accounts receivable of $138,000 were collected including accounts of $60,000 on
which 2% sales discounts were allowed.
2. $5,300 was received in payment of an account which was written off the books as
worthless in 2019.
3. Customer accounts of $17,500 were written off during the year.
4. 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.

You might also like