Chapter 7: 3BE (page 363)
Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.
The net amount of sales is equal to $48,500.
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Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.
1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.
2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.
3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).
4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.
5. Petty cash fund of \)1,000.
6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.
7. A bank overdraft of \)110,000 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.
8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.
9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.
10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.
11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.
12. Currency and coin on hand amounted to $7,700.
Instructions
(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.
(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.
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 account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet 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 |
Between 16 and 30 days | 100,000 | .90 |
Between 31 and 45 days | 80,000 | .85 |
Between 46 and 60 days | 40,000 | .80 |
Between 61 and 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 balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.
1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.
2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.
3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2018.
Instructions
Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.
(Bad Debts—Aging) Danica Patrick, Inc. includes the following account among its trade receivables.
Hopkins Company | |||||
1/1 | Balance forward | 700 | 1/28 | Cash (#1710) | $1,100 |
1/20 | Invoice #1710 | 1,100 | 4/2 | Cash (#2116) | 1,350 |
3/14 | Invoice #2116 | 1,350 | 4/10 | Cash (1/1 Balance) | 155 |
4/12 | Invoice #2412 | 1,710 | 4/30 | Cash (#2412) | 1,000 |
9/5 | Invoice #3614 | 490 | 9/20 | Cash (#3614 and part of #2412) | 790 |
10/17 | Invoice #4912 | 860 | 10/31 | Cash (#4912) | 860 |
11/18 | Invoice #5681 | 2,000 | 12/1 | Cash (#5681) | 1,250 |
12/20 | Invoice #6347 | 800 | 12/29 | Cash (#6347) | 800 |
Instructions
Age the balance and specify any items that apparently require particular attention at year-end
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