Chapter 7: Question 12Q (page 362)
Explain how accounting for bad debts can be used for earnings management.
Companies can manage their earnings byover and underestimating the bad debts expenses.
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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.
(Bank Reconciliation and Adjusting Entries) Logan Bruno Company has just received the August 31, 2017, bank statement, which is summarized below.
Country National Bank | Disbursement | Receipts | Balance |
Balance August 1 | \(9,369 | ||
Deposits during August | \)32,200 | \(41,569 | |
Note collected for depositor, including \)40 interest | 1,040 | 42,609 | |
Checks cleared during August | 34,500 | 8,109 | |
Bank service charges | 20 | 8,089 | |
Balance, August 31 | 8,089 |
The general ledger Cash account contained the following entries for the month of August.
Cash | |||
Balance, August 1 | 10,050 | Disbursement in August | 34,903 |
Receipt during August | 35,000 |
Deposits in transit at August 31 are \(3,800, and checks outstanding at August 31 total \)1,050. Cash on hand at August 31 is \(310. The bookkeeper improperly entered one check in the books at \)146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.
Instructions
(a) Prepare a bank reconciliation dated August 31, 2017, 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 August 31 balance sheet?
On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.
After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.
Instructions
What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2017, and its balance sheet at December 31, 2017?
(Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of \(200,000 to Joffrey Company for \)160,000 on a with recourse basis.
When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
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