Section 5 and 6 - Cash and receivables

Question 7:
The trial balance before adjustment of Risen Company reports the following balances:
Dr. Cr.
Accounts receivable $100,000
Allowance for doubtful accounts $ 2,500
Sales (all on credit) 750,000
Sales returns and allowances 40,000

Required:
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated
to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of $2,500 instead of a credit balance. How will this
difference affect the journal entries in part (a)?

Answer
(a) (1) Bad Debt Expense ........................................................ 3,500
Allowance for Doubtful Accounts ....................... 3,500
Gross receivables $100,000
Rate 6%
Total allowance needed 6,000
Present allowance (2,500)
Bad debt expense $ 3,500

(2) Bad Debt Expense ........................................................ 7,100

Allowance for Doubtful Accounts ....................... 7,100
Sales $750,000
Sales returns and allowances (40,000)
Net sales 710,000
Rate 1%
Bad debt expense $ 7,100
(b) The percentage of receivables approach would be affected as follows:
Gross receivables $100,000
Rate 6%
Total allowance needed 6,000
Present allowance 2,500
Additional amount required $ 8,500

The journal entry is therefore as follows:

Bad Debt Expense ........................................................ 8,500
Allowance for Doubtful Accounts ....................... 8,500

The entry would not change under the percentage of sales method.

Question 9:
A trial balance before adjustment included the following:
Debit Credit
Accounts receivable €80,000
Allowance for doubtful accounts 730
Sales €340,000
Sales returns and allowances 8,000

Give journal entries assuming that the estimate of uncollectibles is determined by taking (1)
5% of gross accounts receivable and (2) 1% of net sales.
 Answer
(1) Bad Debt Expense ................................................................. 3,270
Allowance for Doubtful Accounts ............................ 3,270
Gross receivables €80,000
Rate 5%
Total allowance needed 4,000
Present allowance (730)
Adjustment needed € 3,270

2) Bad Debt Expense 3,320

Allowance for Doubtful Accounts ............................ 3,320
Sales €340,000
Sales returns and allowances 8,000
Net sales 332,000
Rate 1%
Bad debt expense € 3,320

Question 10 :
Accounts receivable in the amount of $250,000 were assigned to the Fast Finance Company by
Marsh, Inc., as security for a loan of $200,000. The finance company charged a 4%
commission on the face amount of the loan, and the note bears interest at 9% per year.

During the first month, Marsh collected $130,000 on assigned accounts. This amount was
remitted to the finance company along with one month’s interest on the note.

Required:
Make all the entries for Marsh Inc. associated with the assignment of the accounts receivable,
the loan, and the remittance to the finance company.
Cash ....................................................................................... 192,000
Interest Expense .................................................................... 8,000
Notes Payable ............................................................. 200,000

Cash ....................................................................................... 130,000

Accounts Receivable ................................................... 130,000

Notes Payable ........................................................................ 130,000

Interest Expense .................................................................... 1,500
Cash ............................................................................
131,500

Question 11 :
The trial balance before adjustment of Risen Company reports the following balances:
Dr. Cr.
Accounts receivable $100,000
Allowance for doubtful accounts $ 2,500
Sales (all on credit) 750,000
Sales returns and allowances 40,000
Required:
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated
to be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of $2,500 instead of a credit balance. How will this
difference affect the journal entries in part (a)?
Answer
(a) (1) Bad Debt Expense ........................................................ 3,500
Allowance for Doubtful Accounts ....................... 3,500
Gross receivables $100,000
Rate 6%
Total allowance needed 6,000
Present allowance (2,500)
Bad debt expense $ 3,500

(2) Bad Debt Expense ................................................................ 7,100

Allowance for Doubtful Accounts ....................... 7,100
Sales $750,000
Sales returns and allowances (40,000)
Net sales 710,000
Rate 1%
Bad debt expense $ 7,100
(b) The percentage of receivables approach would be affected as follows:
Gross receivables $100,000
Rate 6%
Total allowance needed 6,000
Present allowance 2,500
Additional amount required $ 8,500

The journal entry is therefore as follows:

Bad Debt Expense ........................................................ 8,500
Allowance for Doubtful Accounts ....................... 8,500

The entry would not change under the percentage of sales method.

Question 12:
On December 31, 2015, Green Company finished consultation services and accepted in
exchange a promissory note with a face value of €400,000, a due date of December 31, 2018,
and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the
services is not readily determinable and the note is not readily marketable. Under the
circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
Interest Rate
Table Factors For Three Periods 5% 10%
Future Value of 1 1.15763 1.33100
Present Value of 1 .86384 .75132
Future Value of Ordinary Annuity of 1 3.15250 3.31000
Present Value of Ordinary Annuity of 1 2.72325 2.48685

Required:
(a) Determine the present value of the note.
(b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective
interest method. (Round to whole dollars.)
Answer
(a) Present value of interest = €20,000 × 2.48685 = € 49,737
Present value of maturity value = €400,000 × .75132 = 300,528
€350,265
(b) Green Company
Schedule of Note Discount Amortization
Effective Interest Method
5% Note Discounted at 10% (Imputed)

Cash Effective Unamortized Present

Interest Interest Discount Discount Value
Date (5%) (10%) Amortized Balance of Note
12/31/15 €49,735
€350,265
12/31/16 €20,000 € 35,027 €15,027 34,708 365,292
12/31/17 20,000 36,529 16,529 18,179 381,821
12/31/18 20,000 38,179* 18,179 0 400,000
€60,000 €109,735 €49,735

*€3 adjustment to compensate for rounding.

Question 13:
Prepare journal entries for Mars Co. for:
(a) Accounts receivable in the amount of $500,000 were assigned to Utley Finance Co. by
Mars as security for a loan of $425,000. Utley charged a 3% commission on the accounts;
the interest rate on the note is 12%.
(b) During the first month, Mars collected $200,000 on assigned accounts after deducting $450
of discounts. Mars wrote off a $530 assigned account.
(c) Mars paid to Utley the amount collected plus one month’s interest on the note.

Answer
(a) Cash ....................................................................................... 410,000
Interest Expense ...................................................................... 15,000
Notes Payable .............................................................. 425,000

(b) Cash ....................................................................................... 200,000

Sales Discounts ....................................................................... 450
Allowance for Doubtful Accounts .............................................. 530
Accounts Receivable .................................................... 200,980

(c) Notes Payable .......................................................................... 200,000

Interest Expense ...................................................................... 4,250
Cash ............................................................................. 204,250

Question 14 :
Benson Plastics Company deposits all receipts and makes all payments by check. The
following information is available from the cash records:

MARCH 31 BANK RECONCILIATION

Balance per bank €26,746

Add: Deposits in transit 2,100
Deduct: Outstanding checks (3,800)
Balance per books €25,046

Month of April Results

Per Bank Per Books
Balance April 30 €27,995 €28,855
April deposits 10,784 13,889
April checks 11,600 10,080
April note collected (not included in April deposits) 3,000 -0-
April bank service charge 35 -0-
 April NSF check of a customer returned by the bank
(recorded by bank as a charge) 900 -0-

Required:
(a) Calculate the amount of the April 30:
1. Deposits in transit
2. Outstanding checks
(b) What is the April 30 adjusted cash balance? Show all work.
Answer
(a) 1. Deposits in transit, €5,205 [€13,889 – (€10,784 – €2,100)]
2. Outstanding checks, €2,280 [€10,080 – (€11,600 – €3,800)]

(b) Adjusted cash balance at April 30, €30,920

(€27,995 + €5,205 – €2,280) OR (€28,855 + €3,000 – €35 – €900)