Chapter 7: Question 8 (page 362)
What are the basic problems that occur in the valuation of accounts receivable?
A business entity faces difficulties relating to face value determination, probability of collection, and determination of outstanding period while valuing accounts receivable.
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Under IFRS:
(a) the entry to record estimated uncollected accounts is the same as GAAP.
(b) loans and receivables should only be tested for impairment as a group.
(c) it is always acceptable to use the direct write-off method.
(d) all financial instruments are recorded at fair value.
Restin Co. uses the gross method to record sales made on credit. On June 1, 2017, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2017, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.
(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
Instructions
(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.
(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.
(Petty Cash, Bank Reconciliation) Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2017. He has collected the following information from Nottleman’s bookkeeper for this task.
Petty Cash
1. The petty cash fund was established on May 10, 2017, in the amount of \(250.
2. Expenditures from the fund by the custodian as of May 31, 2017, were evidenced by approved receipts for the following.
Postage expenses | \)33.00 |
Mailing Labels and Other Supplies | 65.00 |
I.O.U from employees | 30.00 |
Shipping charges | 57.45 |
Newspaper advertising | 22.80 |
Miscellaneous expenses | 15.35 |
On May 31, 2017, the petty cash fund was replenished and increased to \(300; currency and coin in the fund at that time totaled \)26.40.
Bank Reconciliation
THIRD NATIONAL BANK | |||
BANK STATEMENT | |||
Disbursements | Receipts | Balance | |
Balance 1 May, 2017 | \(8,769 | ||
Deposits | \)28,000 | ||
Note payment direct from customer (\(30) | 930 | ||
Check clearing during May | \)31,150 | ||
Bank service charges | 27 | ||
Balance 31 May, 2017 | 6,522 |
Nottleman’s Cash Account | |
Balance 1 May 2017 | \(8,850 |
Deposit during May 2017 | 31,000 |
Checks written during May 2017 | (31,835) |
Deposits in transit are determined to be \)3,000, and checks outstanding at May 31 total \(850. Cash on hand (besides petty cash) at May 31, 2017, is \)246.
Instructions
(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.
(b) Prepare a bank reconciliation dated May 31, 2017, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete.
(c) What amount of cash should be reported in the May 31, 2017, balance sheet?
(Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2017.
1. An aging schedule of the accounts receivable as of December 31, 2017, is as follows.
Age | Net Debit Balance | % to be applied after correction is made |
Under 60-days | \(172,342 | 1% |
60-90 days | 136,490 | 3% |
91-120 days | 39,924 | 6% |
Over 120 days | 23,644 | \)3,700 definitely uncollectible; estimated remainder uncollectible is 25% |
\(372,400 |
*The \)3,240 write-off of receivables is related to the 91-to-120 day category.
2. The Accounts Receivable control account has a debit balance of \(372,400 on December 31, 2017.
3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for \)3,240 on November 3, 2017, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.
4. Allowance for Doubtful Accounts is as follows for 2017.
Allowance for Doubtful Accounts | |||||
Nov 3 | Uncollectible accounts written off | 3,240 | Jan 1 | Beginning balance | 8,750 |
Dec 31 | 5% of \(372,400 | 18,620 |
5. A credit balance exists in Accounts Receivable (60–90 days) of \)4,840, which represents an advance on a sales contract.
Instructions
Assuming that the books have not been closed for 2017, make the necessary correcting entries.
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