c07BExercises.qxd 11/20/12 12:21 PM Page B EXERCISES E7-1B (Determining Cash Balance) The controller for Clair Co is attempting to determine the amount of cash to be reported on its December 31, 2014, balance sheet The following information is provided Commercial savings account of $1,200,000 and a commercial checking account balance of $1,800,000 are held at First National Bank of Yojimbo A money market fund account of $10,000,000, held at Nguyen Co (a mutual fund organization) permits Clair Co to write checks on this balance Travel advances of $360,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction) A separate cash fund in the amount of $3,000,000 is restricted for the retirement of long-term debt Petty cash fund of $2,000 An I.O.U from Nyamaan, a company customer, in the amount of $380,000 A bank overdraft of $220,000 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 The company has two certificates of deposit, each totaling $1,000,000 These CDs have a maturity of 120 days Clair has received a check that is dated January 12, 2015, in the amount of $250,000 10 Clair has agreed to maintain a cash balance of $1,000,000 at all times at First National Bank of Yojimbo to ensure future credit availability 11 Clair has purchased $4,200,000 of commercial paper of Sergio Leone Co which is due in 60 days 12 Currency and coin on hand amounted to $15,400 Instructions (a) Compute the amount of cash to be reported on Clair Co.’s balance sheet at December 31, 2014 (b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2014, balance sheet E7-2B (Determine 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 Checking account balance $111,000; savings account balance $212,000; cash advance to subsidiary of $500,000; utility deposit paid to electric company $100 Checking account balance $111,000; an overdraft in special checking account at same bank as normal checking account of $5,000; cash held in a bond sinking fund $1,200,000; petty cash fund $500; certified check from customer $1,500 Checking account balance $205,000; postdated check from customer $10,000; cash restricted due to maintaining compensating balance requirement of $100,000; postage stamps on hand $123 cash advance of $5,000 to company executive, payable on demand Checking account balance at bank $61,000; money market balance at mutual fund (has checking privileges) $275,000; NSF check received from customer $1,600 Checking account balance $171,000; cash restricted for future plant expansion $1,200,000; shortterm Treasury bills $200,000; cash advance received from customer $900 (not included in checking account balance); refundable deposit of $50,000 paid to federal government to guarantee performance on construction contract E7-3B (Financial Statement Presentation of Receivables) Rebel Company shows a balance of $428,520 in the Accounts Receivable account on December 31, 2014 The balance consists of the following Installment accounts due in 2015 Installment accounts due after 2015 Overpayments to creditors Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan Advances to executives Advance to subsidiary company (made in 2014) $ 21,000 82,000 10,320 261,000 4,200 50,000 Instructions Illustrate how the information above should be shown on the balance sheet of Rebel Company on December 31, 2014 c07BExercises.qxd • 11/20/12 12:21 PM Page Chapter Cash and Receivables E7-4B (Determine Ending Accounts Receivable) Your accounts receivable clerk, Ms Oommen, to whom you pay a salary of $6,500 per month, has just purchased a new Cadillac You decided to test the accuracy of the accounts receivable balance of $87,000 as shown in the ledger The following information is available for your first year in business (1) (2) (3) (4) Collections from customers Merchandise purchased Ending merchandise inventory Goods are marked to sell at 50% above cost $203,000 325,000 95,000 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 E7-5B (Record Sales Gross and Net) On June 3, Patel Company sold to Pham Inc merchandise having a sale price of $1,500 with terms of 2/10, n/60, f.o.b shipping point An invoice totaling $45, terms n/30, was received by Pham on June from the John Booth Transport Service for the freight cost On June 12, the company received a check for the balance due from Pham Instructions (a) Prepare journal entries on the Patel 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 Pham did not remit payment until July 29 E7-6B (Recording Sales Transactions) Presented below is information from Quezada Computers Incorporated July 10 17 30 Sold $10,000 of computers to Robertson Company with terms 2/15, n/60 Quezada uses the gross method to record cash discounts Quezada received payment from Robertson for the full amount owed from the July transaction Sold $100,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30 The Clark Store paid Quezada for its purchase of July 17 Instructions Prepare the necessary journal entries for Quezada Computers E7-7B (Recording Bad Debts) Rodriguez Company reports the following financial information before adjustments Debits Accounts Receivable Allowance for Doubtful Accounts Sales (all on credit) Sales Returns and Allowances Credits $25,000 $ 500 225,000 12,500 Instructions Prepare the journal entry to record Bad Debt Expense assuming Rodriguez Company estimates bad debts at (a) 3% of net sales and (b) 8% of accounts receivable E7-8B (Recording Bad Debts) At the end of 2014 Sanchez Company has accounts receivable of $400,000 and an allowance for doubtful accounts of $20,000 On January 16, 2015, Sanchez Company determined that its receivable from Maximillan Company of $3,000 will not be collected, and management authorized its write-off Instructions (a) Prepare the journal entry for Sanchez Company to write off the Maximillan receivable (b) What is the net realizable value of Sanchez Company’s accounts receivable before the write-off of the Maximillan receivable? (c) What is the net realizable value of Sanchez Company’s accounts receivable after the write-off of the Maximillan receivable? E7-9B (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Santillan Inc shows the following balances Debits Accounts Receivable Allowance for Doubtful Accounts Sales (all on credit) Credits $180,000 3,500 $1,000,000 c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 5% of gross accounts receivable and (b) 1% of net sales E7-10B (Bad-Debt Reporting) The chief accountant for Hollywood Corporation provides you with the following list of accounts receivable written off in the current year Date Customer Amount March 31 June 30 September 30 December 31 MGM Corp Universal Inc TriStar Inc Theaters Corp $ 6,000 10,200 26,500 18,220 Hollywood Corporation 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 Hollywood Corporation’s sales are on a 60-day credit basis Sales for the current year total $7,600,000, and research has determined that bad debt losses approximate 1% of sales Instructions (a) Do you agree or disagree with Hollywood’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 percentageof-sales approach? E7-11B (Bad Debts—Aging) Singh Co includes the following account among its trade receivables Singh Co 1/1 1/20 3/14 4/12 9/5 10/17 11/18 12/20 Balance forward Invoice #1710 Invoice #2116 Invoice #2412 Invoice #3614 Invoice #4912 Invoice #5681 Invoice #6347 1,400 2,200 2,750 3,420 980 1,720 4,000 1,600 1/28 4/2 4/10 4/30 9/20 10/31 12/1 12/29 Cash (#1710) Cash (#2116) Cash (1/1 Balance) Cash (#2412) Cash (#3614 and part of #2412) Cash (#4912) Cash (#5681) Cash (#6347) 2,200 2,750 310 2,000 1,580 1,720 2,500 1,600 Instructions Age the balance and specify any items that apparently require particular attention at year-end E7-12B (Journalizing Various Receivable Transactions) Presented below is information related to Junket Corp August Junket Corp sold to Sharper Co merchandise having a sales price of $21,000 with terms 1/10, net/60 Junket records its sales and receivables net Accounts receivable of $57,000 (gross) are factored with Easy Credit Corp with recourse at a financing charge of 5% Cash is received for the proceeds; collections are handled by the finance company (These accounts were all past the discount period.) Specific accounts receivable of $30,000 (gross) are pledged to Second Credit Corp as security for a loan of $20,000 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.) Sep 29 Sharper Co notifies Junket that it is bankrupt and will pay only 20% of its account Give the entry to write off the uncollectible balance using the allowance method (Note: First record the increase in the receivable when the discount period passed.) Instructions Prepare all necessary entries in general journal form for Junket Corp E7-13B (Assigning Accounts Receivable) On April 1, 2014, Somers Company assigns $200,000 of its accounts receivable to Third National Bank as collateral for a $100,000 loan due July 1, 2014 The assignment agreement calls for Somers Company to continue to collect the receivables Third National Bank assesses a finance charge of 3% of the accounts receivable, and interest on the loan is 8% (a realistic rate of interest for a note of this type) Instructions (a) Prepare the April 1, 2014, journal entry for Somers Company (b) Prepare the journal entry for Somers’s collection of $175,000 of the accounts receivable during the period from April 1, 2014, through June 30, 2014 (c) On July 1, 2014, Somers paid Third National all that was due from the loan it secured on April 1, 2014 • c07BExercises.qxd • 11/20/12 12:21 PM Page Chapter Cash and Receivables E7-14B (Journalizing Various Receivable Transactions) The trial balance before adjustment for Kelly Company shows the following balances Dr Accounts Receivable Allowance for Doubtful Accounts Sales Cr $122,000 2,000 $810,000 Instructions Using the data above, give the journal entries required to record each of the following cases (Each situation is independent.) To obtain additional cash, Kelly factors without recourse $50,000 of accounts receivable with Easy Finance The finance charge is 8% of the amount factored To obtain a one-year loan of $20,000, Kelly assigns $40,000 of specific receivable accounts to B&C Financial The finance charge is 6% of the loan; the cash is received and the accounts turned over to B&C Financial The company wants to maintain the Allowance for Doubtful Accounts at 4% of gross accounts receivable The company wishes to increase the allowance account by 2% of net sales E7-15B (Transfer of Receivables with Recourse) Strassner Corporation factors $262,500 of accounts receivable with Sultanali Financing, Inc on a with recourse basis Sultanali Financing will collect the receivables The receivables records are transferred to Sultanali Financing on August 15, 2014 Sultanali Financing assesses a finance charge of 3% of the amount of accounts receivable and also reserves an amount equal to 5% of accounts receivable to cover probable adjustments Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met Prepare the journal entry on August 15, 2014, for Strassner to record the sale of receivables, assuming the recourse obligation has a fair value of $3,000 E7-16B (Transfer of Receivables with Recourse) Grace Corporation factors $200,000 of accounts receivable with Kelly Financing, Inc on a with recourse basis Kelly Financing will collect the receivables The receivables records are transferred to Kelly Financing on April 10, 2014 Kelly Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 6% of accounts receivable to cover probable adjustments Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met Prepare the journal entry on April 10, 2014, for Grace to record the sale of receivables, assuming the recourse obligation has a fair value of $4,500 E7-17B (Transfer of Receivables without Recourse) SYKES Corp factors $100,000 of accounts receivable with KTT Finance Corporation on a without recourse basis on July 1, 2014 The receivables records are transferred to KTT Finance, which will receive the collections KTT Finance assesses a finance charge of 2% of the amount of accounts receivable and retains an amount equal to 5% 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, 2014, for SYKES Corp to record the sale of receivables without recourse (b) Prepare the journal entry on July 1, 2014, for KTT Finance Corporation to record the purchase of receivables without recourse E7-18B (Note Transactions at Unrealistic Interest Rates) On July 1, 2014, Taylor Inc made two sales It sold land having a fair market value of $500,000 in exchange for a 4-year, zero-interest-bearing promissory note in the face amount of $732,053.70 The land is carried on Taylor’s books at a cost of $375,000 It rendered services in exchange for a 4%, 8-year promissory note having a face value of $400,000 (interest payable annually) Taylor Inc recently had to pay 7% 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 10% interest c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises Instructions Record the two journal entries that should be recorded by Taylor Inc for the sales transactions above that took place on July 1, 2014 E7-19B (Notes Receivable with Unrealistic Interest Rate) On December 31, 2012, Tran Co performed environmental consulting services for Hayden Co Hayden was short of cash, and Tran Co agreed to accept a $100,000 zero-interest-bearing note due December 31, 2014, as payment in full Hayden is somewhat of a credit risk and typically borrows funds at a rate of 15% Tran is much more creditworthy and has various lines of credit at 8% Instructions (a) Prepare the journal entry to record the transaction of December 31, 2012, for Tran Co (b) Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2013 (c) Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2014 E7-20B (Analysis of Receivables) Presented below is information for Monaco Company Beginning-of-the-year Accounts Receivable balance was $56,000 Net sales (all on account) for the year were $685,000 Monaco does not offer cash discounts Collections on accounts receivable during the year were $650,000 Instructions (a) Prepare (summary) journal entries to record the items noted above (b) Compute Monaco accounts receivable turnover ratio for the year The company does not believe it will have any bad debts (c) Use the turnover ratio computed in (b) to analyze Monaco’s liquidity The turnover ratio last year was 8.0 E7-21B (Transfer of Receivables) Use the information for Monaco Company as presented in E7-20B Monaco is planning to factor some accounts receivable at the end of the year Accounts totaling $50,000 will be transferred to Credit Factors, Inc with recourse Credit Factors will retain 6% of the balances for probable adjustments and assesses a finance charge of 4% The fair value of the recourse obligation is $2,000 Instructions (a) Prepare the journal entry to record the sale of the receivables (b) Compute Monaco’s accounts receivables turnover ratio for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio 10 *E7-22B (Petty Cash) Velez, 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 On April 1, it established a petty cash fund in the amount of $1,000 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 Supplies purchased and used Postage expense I.O.U from employees Miscellaneous expense $300.00 125.00 165.00 85.00 180.00 The petty cash fund was replenished on April 10 The balance in the fund was $135 The petty cash fund balance was increased $500 to $1,500 on April 20 Instructions Prepare the journal entries to record transactions related to petty cash for the month of April 10 *E7-23B (Petty Cash) The petty cash fund of Rift’s Dress Shop, a sole proprietorship, contains the following Coins and currency Postage stamps An I.O.U from Jake, an employee, for cash advance Check payable to Rift’s Dress Ship from lvan, an employee, marked NSF Vouchers for the following: Stamps Printer toner cartridge $ 46.50 12.90 25.00 12.00 $40.00 61.15 101.15 $197.55 The general ledger account Petty Cash has a balance of $200 • c07BExercises.qxd • 11/20/12 12:21 PM Page Chapter Cash and Receivables Instructions Prepare the journal entry to record the reimbursement of the petty cash fund 10 *E7-24B (Bank Reconciliation and Adjusting Entries) Wang Company 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 Add: Deposits in transit Deduct: Outstanding checks $14,000 3,080 (4,000) Balance per books $13,080 Month of July Results Per Bank Balance July 31 July deposits July checks July note collected (not included in July deposits) July bank service charge July NSF check from a customer, returned by the bank (recorded by bank as a charge) $17,300 10,000 8,000 2,000 30 670 Per Books $18,500 11,620 6,200 — — — Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance (b) Prepare the general journal entry or entries to correct the Cash account 10 *E7-25B (Bank Reconciliation and Adjusting Entries) Elfen Company has just received the October 31, 2014, bank statement, which is summarized below Tri National Bank Disbursements Balance, October Deposits during October Note collected for depositor, including $40 interest Checks cleared during October Bank service charges Balance, October 31 Receipts Balance $47,200 2,040 $54,501 10 $21,361 68,561 70,601 16,100 16,090 16,090 The general ledger Cash account contained the following entries for the month of October Cash Balance, October Receipts during October 17,801 45,000 Disbursements in October 45,271 Deposits in transit at October 31 are $4,800, and checks outstanding at October 31 total $1,550 Cash on hand at October 31 is $250 The bookkeeper improperly entered one check in the books at $210.00 which was written for $180.00 for supplies (expense); it cleared the bank during the month of October Instructions (a) Prepare a bank reconciliation dated October 31, 2014, 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 October 31 balance sheet? 11 *E7-26B (Impairments) On December 31, 2014, Lloyds Company borrowed $50,663 from London Bank, signing a 6-year, $100,000 zero-interest-bearing note The note was issued to yield 12% interest Unfortunately, during 2017, Lloyds began to experience financial difficulty As a result, at December 31, 2017, London Bank determined that it was probable that it would receive back only $60,000 at maturity The market rate of interest on loans of this nature is now 15% Instructions (a) Prepare the entry to record the issuance of the loan by London Bank on December 31, 2014 (b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2017, by London Bank c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises 11 *E7-27B (Impairments) On December 31, 2014, State Construction Company signed a $1,000,000 note to Third National Bank The market interest rate at that time was 15% The stated interest rate on the note was 10%, payable annually The note matures in years Unfortunately, because of lower sales, State Construction’s financial situation worsened On December 31, 2016, Third National Bank determined that it was probable that the company would pay back only $700,000 of the principal at maturity However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan Instructions (a) Determine the amount of cash State Construction received from the loan on December 31, 2014 (b) Prepare a note amortization schedule for Third National Bank up to December 31, 2016 (c) Determine the loss on impairment that Third National Bank should recognize on December 31, 2016 • c07BExercises.qxd 11/20/12 12:21 PM Page ... Doubtful Accounts Sales (all on credit) Credits $180,000 3,500 $1,000,000 c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises Instructions Give the entry for estimated bad debts assuming that... transactions have credit ratings that require them to borrow money at 10% interest c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises Instructions Record the two journal entries that should be recorded... record the impairment of the loan on December 31, 2017, by London Bank c07BExercises.qxd 11/20/12 12:21 PM Page B Exercises 11 *E7-27B (Impairments) On December 31, 2014, State Construction