Exercise 7-1 (20 Minutes)

Chapter 7

EXERCISES

Exercise 7-1 (20 minutes)

Apr. 8 / Cash / 8,832
Credit Card Expense* / 368
Sales / 9,200
To record credit card sales less 4% fee.
*($9,200 x .04)
Cost of Goods Sold / 6,800
Merchandise Inventory / 6,800
To record cost of sales.
12 / Accounts Receivable—Continental Bank / 5,265
Credit Card Expense* / 135
Sales / 5,400
To record credit card sales less 2.5% fee.
*($5,400 x .025)
Cost of Goods Sold / 3,500
Merchandise Inventory / 3,500
To record cost of sales.
20 / Cash / 5,265
Accounts Receivable—Continental Bank / 5,265
To record cash received on credit sales less fees.

Exercise 7-2 (25 minutes)

Part 1

GENERAL LEDGER

Accounts Receivable /
Sales / Sales Returns and
Allowances
Nov. 5 / 4,417 / Nov. 21 / 189 / Nov. 5 / 4,417 /

Nov. 21

/ 189
10 / 1,250 / 10 / 1,250
13 / 733 / 13 / 733
30 / 2,606 / 30 / 2,606
Bal. / 8,817

ACCOUNTS RECEIVABLE LEDGER

Surf Shop / Yum Enterprises / Matt Albin
Nov. 5 / 4,417 /

Nov. 10

/ 1,250 /

Nov. 13

/ 733 / Nov. 21 / 189
30 / 2,606
Bal. / 7,023 / Bal. / 544

Part 2

Sami Company
Schedule of Accounts Receivable
November 30, 2011
Surf Shop / $7,023
Yum Enterprises / 1,250
Matt Albin / 544
Total / $8,817

Comparison: The total of the Schedule of Accounts Receivable ($8,817) is proved with the balance of the Accounts Receivable controlling T-account from Part 1 ($8,817).

Exercise 7-3 (20 minutes)

June 11 / Bad Debts Expense / 9,000
Accounts Receivable—Chaffey Co. / 9,000
To write off an account.
June 29 / Accounts Receivable—Chaffey Co. / 9,000
Bad Debts Expense / 9,000
To reinstate an account previously written off.
June 29 / Cash / 9,000
Accounts Receivable—Chaffey Co. / 9,000
To record cash received on account.

Exercise 7-4 (20 minutes)

Dec. 31 / Bad Debts Expense / 4,375
Allowance for Doubtful Accounts / 4,375
To record estimated bad debts expense
(.005 x $875,000).
Feb. 1 / Allowance for Doubtful Accounts / 420
Accounts Receivable—P. Coble / 420
To write off an account.
June 5 / Accounts Receivable—P. Coble / 420
Allowance for Doubtful Accounts / 420
To reinstate an account.
June 5 / Cash / 420
Accounts Receivable—P. Coble / 420
To record cash received on account.

Exercise 7-5 (15 minutes)

a.
Dec. 31 / Bad Debts Expense* / 1,205
Allowance for Doubtful Accounts / 1,205
To record estimated bad debts expense.
*Unadjusted balance /
= $ 915 credit
Estimated balance ($53,000 x .04) / = 2,120 credit
Required adjustment / = $1,205 credit
b.
Dec. 31 / Bad Debts Expense** / 3,452
Allowance for Doubtful Accounts / 3,452
To record estimated bad debts expense.
** Unadjusted balance /
= $ 1,332 debit
Estimated balance ($53,000 x .04) / = 2,120 credit
Required adjustment / = $3,452 credit

Exercise 7-6 (30 minutes)

a. Computation of the estimated balance of the allowance for uncollectibles:

Not due: / $132,000 x 0.01 = / $ 1,320
1 to 30: / 30,000 x 0.02 = / 600
31 to 60: / 12,000 x 0.04 = / 480
61 to 90: / 6,000 x 0.07 = / 420
Over 90: / 10,000 x 0.12 = / 1,200
$ 4,020 / credit

b.

Dec. 31 / Bad Debts Expense / 3,420
Allowance for Doubtful Accounts / 3,420
To record estimated bad debts.*
* Unadjusted balance / $ 600 credit
Estimated balance / 4,020 credit
Required adjustment / $3,420 credit

c.

Dec. 31 / Bad Debts Expense / 4,420
Allowance for Doubtful Accounts / 4,420
To record estimated bad debts.*
* Unadjusted balance / $ 400 debit
Estimated balance / 4,020 credit
Required adjustment / $4,420 credit

Exercise 7-7 (25 minutes)

a. Computation of the estimated balance of the allowance for uncollectibles:

$190,000 x 0.035 = / $6,650 / credit

b.

Dec. 31 / Bad Debts Expense / 6,350
Allowance for Doubtful Accounts / 6,350
To record estimated bad debts.*
* Unadjusted balance / $ 300 credit
Estimated balance / 6,650 credit
Required adjustment / $6,350 credit

c.

Dec. 31 / Bad Debts Expense / 6,850
Allowance for Doubtful Accounts / 6,850
To record estimated bad debts.*
* Unadjusted balance / $ 200 debit
Estimated balance / 6,650 credit
Required adjustment / $6,850 credit

Exercise 7-8 (20 minutes)

Feb. 1 / Allowance for Doubtful Accounts / 1,900
Accounts Receivable—Oxford Co / 400
Accounts Receivable—Brookes Co / 1,500
To write off specific accounts.
June 5 / Accounts Receivable—Oxford / 400
Allowance for Doubtful Accounts / 400
To reinstate an account.
June 5 / Cash / 400
Accounts Receivable—Oxford / 400
To record cash received on account.

Exercise 7-9 (25 minutes)

a. Expense is 1.5% of credit sales
Dec. 31 / Bad Debts Expense / 13,500
Allowance for Doubtful Accounts / 13,500
To record estimated bad debts
[$900,000 x .015].
b. Expense is 0.5% of total sales
Dec. 31 / Bad Debts Expense / 10,500
Allowance for Doubtful Accounts / 10,500
To record estimated bad debts
[($900,000 + $1,200,000) x .005].
c. Allowance is 6% of accounts receivable
Dec. 31 / Bad Debts Expense / 14,700
Allowance for Doubtful Accounts / 14,700
To record estimated bad debts.*
* Unadjusted balance / $ 3,000 debit.
Estimated balance ($195,000 x 6%) / 11,700 credit
Required adjustment / $14,700 credit

Exercise 7-10 (20 minutes)

July 4 / Accounts Receivable / 6,295
Sales / 6,295
To record sales on credit.
Cost of Goods Sold / 4,000
Merchandise Inventory / 4,000
To record cost of sales.
9 / Cash / 17,280
Factoring Fee Expense* / 720
Accounts Receivable / 18,000
To record sale of receivable. *($18,000 x .04)
17 / Cash / 3,436
Accounts Receivable / 3,436
To record cash received on account.
27 / Cash / 10,000
Notes Payable / 10,000
To record cash from a loan.

Note to Financial Statements:

Accounts receivable in the amount of $13,000 are pledged as security for a $10,000 note payable to Center Bank.

Exercise 7-11 (15 minutes)

Nov. 1 / Notes Receivable—M. Allen / 5,000
Accounts Receivable—M. Allen / 5,000
To record receipt of note on account.
Dec. 31 / Interest Receivable / 50
Interest Revenue / 50
To record interest earned
[$5,000 x .06 x 60/360].
Apr. 30 / Cash / 5,150
Notes Receivable—M. Allen / 5,000
Interest Revenue / 100
Interest Receivable / 50
To record cash received on note plus
interest earned [$5,000 x .06 x 120/360].

Exercise 7-12 (20 minutes)

Mar. 21 / Notes Receivable—S. Hernandez / 3,100
Accounts Receivable—S. Hernandez / 3,100
To record receipt of note on account.
Sept. 17 / Accounts Receivable—S. Hernandez / 3,255
Interest Revenue / 155
Notes Receivable—S. Hernandez / 3,100
To record note dishonored plus interest
earned [$3,100 x .10 x 180/360 = $155].
Dec. 31 / Allowance for Doubtful Accounts / 3,255
Accounts Receivable—S. Hernandez / 3,255
To write off an account.

Exercise 7-13 (10 minutes)

2010
Dec. 13 / Notes Receivable—L. Clark / 10,000
Accounts Receivable—L. Clark / 10,000
To record receipt of note on account.
31 / Interest Receivable / 40
Interest Revenue / 40
To record interest earned
[$10,000 x .08 x 18/360].

Exercise 7-14 (15 minutes)

2011
Jan. 27 / Cash / 10,100
Interest Revenue / 60
Interest Receivable / 40
Notes Receivable—L. Clark / 10,000
To record cash received on note plus
interest. [$10,000 x .08 x (45-18)/360= $60]
Mar. 3 / Notes Receivable—Shandi Co. / 4,000
Accounts Receivable-Shandi Co / 4,000
To record receipt of note on account.
17 / Notes Receivable—J. Torres / 2,000
Accounts Receivable—J. Torres / 2,000
To record receipt of note on account.
Apr. 16 / Accounts Receivable—J. Torres / 2,015
Interest Revenue / 15
Notes Receivable—J. Torres / 2,000
To record receivable for dishonored
note plus interest [$2,000 x .09 x 30/360].
May 1 / Allowance for Doubtful Accounts / 2,015
Accounts Receivable—J. Torres / 2,015
To write off account.
June 1 / Cash / 4,100
Interest Revenue / 100
Notes Receivable—Shandi Co / 4,000
To record cash received on note with
interest [$4,000 x .10 x 90/360].

Exercise 7-15 (15 minutes)

Year 2010 accounts receivable turnover:

= 12.4 times

Year 2011 accounts receivable turnover:

= 14.0 times

Analysis: Waseem Company turned over its accounts receivable 1.6 (14.0 – 12.4) times more in 2011 than in 2010. This may indicate that the company has tightened its credit policy or has improved its collection efforts. Also, relative to competitors (turnover of 11), Waseem is performing better than average.

Exercise 7-16 (25 minutes)

a. Expense is 0.4% of total revenues
Dec. 31 / Bad Debts Expense / 40,001
Allowance for Doubtful Accounts / 40,001
To record estimated bad debts
[10,000,369 x 0.004].
b. Allowance is 2.1% of trade receivables
Dec. 31 / Bad Debts Expense / 35,775
Allowance for Doubtful Accounts / 35,775
To record estimated bad debts.*
* Unadjusted balance / 10,000 credit
Estimated balance (2,179,764 x 0.021) / 45,775 credit
Required adjustment / 35,775 credit

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Solutions Manual, Chapter 7