Chapter 7: Question 26 (page 363)
Describe the estimation of the allowance, based on expected cash flows.
Allowance is calculated by deducting the expected discounted cash flow from the actual account or note receivable amount. Discounted cash flow is calculated using the market or effective interest rate.
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On June 3, Arnold Company sold to Chester Company merchandise having a sale price of \(3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling \)90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Chester Company
Instructions
(a) Prepare journal entries on the Arnold 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 Chester Company did not remit payment until July 29.
Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers.
On August 1, 2017, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.
Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2017, and mature on September 30, 2019. Kimmel’s operating cycle is less than one year.
Instructions
(a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method?
(2) Using the net method, what is the effect on Kimmel’s sales revenues and net income when customers do not take the sales discounts?
(b) What is the effect of trade discounts on sales revenues and accounts receivable? Why?
(c) How should Kimmel account for the accounts receivable factor on August 1, 2017? Why?
(d) How should Kimmel account for the note receivable and the related interest on December 31, 2017? Why?
Explain how accounting for bad debts can be used for earnings management.
(Bank Reconciliation and Adjusting Entries) Presented below is information related to Haselhof Inc. Balance per books at October 31, \(41,847.85; receipts \)173,523.91; disbursements \(164,893.54. Balance per bank statement November 30, \)56,274.20.
The following checks were outstanding at November 30.
1224 | \(1,635.29 |
1230 | 2,468.30 |
1232 | 2,125.15 |
1233 | 482.17 |
Included with the November bank statement and not recorded by the company were a bank debit memo for \)27.40 covering bank charges for the month, a debit memo for \(372.13 for a customer’s check returned and marked NSF, and a credit memo for \)1,400 representing bond interest collected by the bank in the name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to $1,915.40.
Instructions
(a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the information above.
(b) Prepare any journal entries required to adjust the cash account at November 30.
Presented below is information from Perez Computers Incorporated.
July 1 Sold \(20,000 of computers to Robertson Company with terms 3/15, n/60. Perez uses the gross method to record cash discounts. Perez estimates allowances of \)1,300 will be honored on these sales.
10 Perez received payment from Robertson for the full amount owed from the July transactions.
17 Sold $200,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.
30 The Clark Store paid Perez for its purchase of July 17.
Instructions
Prepare the necessary journal entries for Perez Computers.
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