Challenge Exercise 1

Chapter Eight

Challenge Exercise 1

Expands on: E8-1

LO: 2

Presented below are selected transactions of Heinrich Company. Heinrich sells in large quantities to other companies and also sells its product in a small retail outlet.

March 1 Sold merchandise on account to Kirk Company for $4,000, terms 2/10, n/30.

3 Kirk Company returned merchandise worth $600 to Heinrich.

9 Heinrich collected the amount due from Kirk Company from the March 1 sale.

15 Heinrich sold merchandise for $8,000 in its retail outlet. The customers used their Heinrich credit card.

31 Heinrich added 1.5% monthly interest to the customers’ credit card balance.

April 10 Heinrich collected $3,050 from credit card customers.

Instructions:

a) Prepare journal entries for the transactions above.

b) What is the balance from credit card transactions in Accounts Receivable after the April 10 transaction?

Challenge Exercise 2

Expands on: 8-3

LO: 3

The ledger of Ruru Company at the end of the current year shows Accounts Receivable $200,000, Sales $1,400,000, and Sales Returns and Allowances $50,000.

Instructions:

(a) If Ruru uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at

December 31, assuming Ruru determines that Barking GhostsCompany’s $2,400 balance is uncollectible.

(b) If Allowance for Doubtful Accounts has a credit balance of $3,500 in the trial balance, journalize the adjusting entry

at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.

(c) If Allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at

December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

(d) Why is the allowance method required by GAAP?

Challenge Exercise 3

Expands on: E9-4

SO: 3

Wilder Company has accounts receivable of $130,000 at March 31. An analysis of the accounts shows the following.

Month of SaleBalance, March 31

March $80,000

February 27,600

January 14,500

Prior to January 7,900

$130,000

Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $1,700 prior to adjustment. The company uses the percentage-of-receivables basis for estimating uncollectible accounts. Wilder estimates that 8% of accounts receivable will become uncollectible. The company is considering using the estimate of bad debts shown below.

Estimated Percentage

Age of Accounts Uncollectible

1–30 days 2.0%

31–60 days 5.0%

61–90 days 30.0%

Over 90 days 50.0%

Instructions:

(a) Prepare the adjusting entry at March 31 to record bad debt expense, assuming that the 8% estimate is used.

(b) Prepare the adjusting entry at March 31 to record bad debt expense, assuming the aging schedule is used.

Challenge Exercise 4

Expands on: E8-5

LO: 3

At December 31, 2013, Dallas Company had a balance of $25,000 in the Allowance for Doubtful Accounts. During 2014, Braddock wrote off accounts totaling $22,200. One of those accounts ($3,000) was later collected. At December 31, 2014, an aging schedule indicated that the balance in the Allowance for Doubtful Accounts should be $32,000.

Instructions:

(a) Prepare journal entries to record the 2014 transactions of Dallas Company.

(b) Indicate the effect (increase, decrease, or no effect) that each of the four transactions has on Dallas Company’s

assets, liabilities, stockholders’ equity, and net income.

Challenge Exercise 5

Expands on: E8-7

LO: 4

Presented below are two independent situations.

(a) On March 3, Mineral Point Appliances sells $700,000 of its receivables to Horicon Factors Inc. Horicon Factors

assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Mineral Point Appliances’

books to record the sale of the receivables.

(b) On May 10, Chip Company sold merchandise for $4,000 and accepted the customer’s America Bank MasterCard.

America Bank charges a 4% service charge for credit card sales. Prepare the entry on Chip Company’s books to record

the sale of merchandise.

(d) Why do companies accept national credit cards?

Challenge Exercise 6

Expands on: E8-10

LO: 5, 6, 8

Ordonez Supply Co. has the following transactions related to notes receivable during the last 2 months of 2014.

Nov. 1 Loaned $20,000 cash to SoozieTakham on a 1-year, 10% note.

Dec. 11 Sold goods to Joe Trater, Inc., receiving a $9,000, 90-day, 8% note.

16 Received a $6,000, 6-month, 9% note in exchange for Boba Fett’s outstanding accounts receivable.

31 Accrued interest revenue on all notes receivable.

Instructions:

(a) Journalize the above transactions for Ordonez Supply Co. Round interest to the nearest dollar.

(b) Record the collection of the Takham note at its maturity in 2015.

(c) Assume Takham dishonors its note at its maturity in 2015; Ordonez expects to eventually collect the note. Record the dishonor of the Takham note.

(d) Assume Takham dishonors its note at its maturity in 2015; Ordonez does not expect to collect the note. Record the dishonor of the Takham note.

Challenge Exercise 7

Expands on: E8-14

LO: 2, 4, 9

The following information pertains to Napa Merchandising Company.

Merchandise inventory at end of year $50,000

Accounts receivable at beginning of year 54,000

Cash sales made during the year 27,000

Gross profit on sales 30,000

Accounts receivable written off during the year 1,500

Purchases made during the year 90,000

Accounts receivable collected during the year 117,000

Merchandise inventory at beginning of year 54,000

Instructions:

(a) Calculate the amount of credit sales made during the year. (Hint:You will need to use income statement

relationships—introduced in Chapter 5—in order to determine this.)

(b) Calculate the balance of accounts receivable at the end of the year.

allowance for doubtful accounts was $1,000 both at the beginning and end of the year.

(For Instructor Use Only)Page 8-1