B Exercises
(Determining Cash Balance) The controller for Clair Co. is attempting to determine the amount of
cash to be reported on its December 31, 2008, balance sheet. The following information is provided.
E8-1B
(LO 1)
1. Commercial savings account of $1,200,000 and a commercial checking account balance of $1,800,000 are
held at First National Bank of Yojimbo.
2. A money market fund account of $10,000,000, held at Nguyen Co. (a mutual fund organization) permits
Clair Co. to write checks on this balance.
3. Travel advances of $360,000 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 $3,000,000 is restricted for the retirement of long-term debt.
5. Petty cash fund of $2,000.
6. An I.O.U. from Nyamaan, a company customer, in the amount of $380,000.
7. A bank overdraft of $220,000 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 $1,000,000. These CDs have a maturity of 120
days.
9. Clair has received a check that is dated January 12, 2009, in the amount of $250,000.
10. Clair has agreed to maintain a cash balance of $1,000,000 at all times at First National Bank of Yojimbo to
ensure future credit availability.
11. Clair has purchased $4,200,000 of commercial paper of Sergio Leone Co. which is due in 60 days.
12. Currency and coin on hand amounted to $15,400.
Instructions
(a) Compute the amount of cash to be reported on Clair Co.’s balance sheet at December 31, 2008.
(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2008, balance sheet.
E8-2B
(Determine Cash Balance) Presented below are a number of independent situations.
(LO 1)
Instructions
For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported
as cash, explain the rationale.
1.
2.
3.
4.
5.
Checking account balance at bank $21,000; money market balance at mutual fund (has no checking privileges) $505,000; NSF check received from customer $350.
Checking account balance $156,000; certificate of deposit $1,400,000; cash advance to subsidiary of
$350,000; utility deposit paid to electric company $250; cash advance of $12,500 to company executive,
payable on demand;
Checking account balance $651,000; postdated check from customer $15,000; cash restricted due to maintaining compensating balance requirement of $500,000; postage stamps on hand $112.
Checking account balance $168,000; cash reserved for future plant expansion $1,500,000; cash advance received from customer $2,000 (not included in checking account balance); refundable deposit of $10,000 paid
to federal government to guarantee performance on construction contract; petty cash fund $500;.
Checking account balance $176,000; an overdraft in payroll account at same bank as normal checking account of $64,500; short-term Treasury bills $91,000; cash held in a bond sinking fund $3,610,000; coins and
currency on hand $1,350.
(Financial Statement Presentation of Receivables) Intrepid Company shows a balance of $579,630
in the Accounts Receivable account on December 31, 2008. The balance consists of the following.
E8-3B
Installment accounts due in 2009
Installment accounts due after 2009
Note receivable from CEO, due on demand
Due from regular customers
Travel advances to employees
Advance to affiliated company (made in 2003)
(LO 3,
4)
$61,000
162,000
45,000
207,130
4,500
100,000
Instructions
Illustrate how the information above should be shown on the balance sheet of Intrepid Company on December
31, 2008.
8-1
8-2
Chapter 8
(LO 3,
4)
Cash and Receivables
E8-4B (Determine Ending Accounts Receivable) Your accounts receivable clerk, Ms. Oommen, to whom
you pay a salary of $6,500 per month, has just purchased a new Cadillac. You decided to test the accuracy of the
accounts receivable balance of $87,000 as shown in the ledger.
The following information is available for your first year in business.
(1)
(2)
(3)
(4)
Collections from customers
Merchandise purchased
Ending merchandise inventory
Goods are marked to sell at 50% above cost
$203,000
325,000
95,000
Instructions
Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger
and any apparent shortages. Assume that all sales are made on account.
(LO 6)
(Record Sales Gross and Net) On June 3, Patel Company sold to Pham Inc. merchandise having a
sale price of $1,500 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $45, terms n/30, was received by Pham on June 8 from the John Booth Transport Service for the freight cost. On June 12, the company
received a check for the balance due from Pham.
E8-5B
Instructions
(a) Prepare journal entries on the Patel 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 Pham did not remit payment until July 29.
(LO 4)
(Recording Sales Transactions) Presented below is information from Quezada Computers
Incorporated.
E8-6B
July 1
10
17
30
Sold $10,000 of computers to Robertson Company with terms 2/15, n/60. Quezada uses the
gross method to record cash discounts.
Quezada received payment from Robertson for the full amount owed from the July 1 transaction.
Sold $100,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.
The Clark Store paid Quezada for its purchase of July 17.
Instructions
Prepare the necessary journal entries for Quezada Computers.
(LO 5)
E8-7B (Recording Bad Debts) Rodriguez Company reports the following financial information before adjustments.
Dr.
Accounts Receivable
Allowance for Doubtful Accounts
Sales (all on credit)
Sales Returns and Allowances
Cr.
$25,000
$
500
225,000
12,500
Instructions
Prepare the journal entry to record Bad Debt Expense assuming Rodriguez Company estimates bad debts at (a)
3% of net sales and (b) 8% of accounts receivable.
(LO 5)
(Recording Bad Debts) At the end of 2007 Sanchez Company has accounts receivable of $400,000
and an allowance for doubtful accounts of $20,000. On January 16, 2008, Sanchez Company determined that
its receivable from Maximillan Company of $3,000 will not be collected, and management authorized its
write-off.
E8-8B
Instructions
(a) Prepare the journal entry for Sanchez Company to write off the Maximillan receivable.
(b) What is the net realizable value of Sanchez Company’s accounts receivable before the write-off of the Maximillan receivable?
(c) What is the net realizable value of Sanchez Company’s accounts receivable after the write-off of the Maximillan receivable?
B Exercises
E8-9B (Computing Bad Debts and Preparing Journal Entries)
Santillan Inc. shows the following balances.
Dr.
Accounts Receivable
Allowance for Doubtful Accounts
Sales (all on credit)
The trial balance before adjustment of
8-3
(LO 5)
Cr.
$180,000
3,500
$1,000,000
Instructions
Prepare the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the
basis of (a) 5% of gross accounts receivable and (b) 1% of net sales.
(Bad-Debt Reporting) The controller for Christina Corporation provides you with the following
list of accounts receivable written off in the current year.
E8-10B
Date
Customer
Amount
March 31
June 30
Sept. 30
Dec. 31
Fender Company
Bender Inc.
Putt Putt International
Tow Trucks Inc.
$2,600
4,100
9,560
4,940
(LO 5)
Christina Corporation follows the policy of debiting Bad Debt Expense as accounts are written off. The controller maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue
Service will not accept other methods for recognizing bad debts.
All of Christina Corporation’s sales are on a 60-day credit basis. Sales for the current year total $4,750,000,
and research has determined that bad debt losses approximate 1% of sales.
Instructions
(a) Do you agree or disagree with Christina’s policy concerning recognition of bad debt expense? Why or
why not?
(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-sales
approach?
E8-11B
(Bad Debts—Aging) Siddiqui, Inc. includes the following account among its trade receivables.
(LO 5)
Singh Co.
1/1
1/20
3/14
4/12
9/5
10/17
11/18
12/20
Balance forward
Invoice #1710
Invoice #2116
Invoice #2412
Invoice #3614
Invoice #4912
Invoice #5681
Invoice #6347
1,400
2,200
2,750
3,420
980
1,720
4,000
1,600
1/28
4/2
4/10
4/30
9/20
10/31
12/1
12/29
Cash (#1710)
Cash (#2116)
Cash (1/1 Balance)
Cash (#2412)
Cash (#3614 and
part of #2412)
Cash (#4912)
Cash (#5681)
Cash (#6347)
2,200
2,750
310
2,000
1,580
1,720
2,500
1,600
Instructions
Age the balance and specify any items that apparently require particular attention at year-end.
E8-12B
(Journalizing Various Receivable Transactions) Presented below is information related to
Odie Corp.
Oct.
1
8
10
Dec.
29
Odie Corp. sold merchandise having a sales price of $25,000 with terms 1/10, net/30. Odie
records its sales and receivables gross.
Accounts receivable of $20,000 (gross) are factored with Gardfield Credit Corp. without
recourse at a financing charge of 12%. Cash is received for the proceeds; collections are
handled by the finance company. (These accounts were all past the discount period.)
Specific accounts receivable of $40,000 (gross) are pledged to John Finance Corp. as security for a loan of $25,000 at a finance charge of 5% of the amount of the loan. The finance
company will make the collections. (All the accounts receivable are past the discount period.)
The customer that the merchandise was sold to on October 1 is experiencing financial difficulties and notifies Odie that it is willing to pay $5,000 in complete satisfaction of its account.
Give the entry to write off the uncollectible balance using the allowance method. Assume that
this customer to not make any payments on the account related to the sale on October 1.
(LO 4,
5, 8)
8-4
Chapter 8
Cash and Receivables
Instructions
Prepare all necessary entries in general journal form for Odie Corp.
(LO 8)
E8-13B (Assigning Accounts Receivable) On April 1, 2008, Somers Company assigns $200,000 of its accounts
receivable to Third National Bank as collateral for a $100,000 loan due July 1, 2008. The assignment agreement
calls for Somers Company to continue to collect the receivables. Third National Bank assesses a finance charge of
3% of the accounts receivable, and interest on the loan is 8% (a realistic rate of interest for a note of this type).
Instructions
(a) Prepare the April 1, 2008, journal entry for Somers Company.
(b) Prepare the journal entry for Somers’s collection of $175,000 of the accounts receivable during the period
from April 1, 2008, through June 30, 2008.
(c) On July 1, 2008, Somers paid Third National all that was due from the loan it secured on April 1, 2008.
Prepare the journal entry to record this payment.
(LO 5,
8)
E8-14B (Journalizing Various Receivable Transactions) The trial balance before adjustment for Galleon
Company shows the following balances.
Dr.
Accounts Receivable
Allowance for Doubtful Accounts
Sales (net)
Cr.
$456,000
$
1,500
683,000
Instructions
Using the data above, prepare the journal entries required to record each of the following cases. (Each situation
is independent.)
1.
2.
3.
4.
(LO 8)
To obtain additional cash, Galleon factors without recourse $100,000 of accounts receivable with London
Finance. The finance charge is 5% of the amount factored.
To obtain a one-year loan of $200,000, Collins assigns $240,000 of specific receivable accounts to Paris
Financial. The finance charge is 6% of the loan; the cash is received and the accounts turned over to Paris
Financial.
The company wants to increase the Allowance for Doubtful Accounts by 2% of sales.
The company wishes to increase the allowance account to 7% of gross accounts receivable.
E8-15B (Transfer of Receivables with Recourse) Delray Company factors receivables with a carrying
amount of $600,000 to Summer Fianance Company for $520,000 on a with recourse basis.
Instructions
The recourse provision has a fair value of $6,000. This transaction should be recorded as a sale. Prepare the
appropriate journal entry to record this transaction on the books of Delray Company.
(LO 8)
E8-16B (Transfer of Receivables with Recourse) Strassner Corporation factors $262,500 of accounts
receivable with Sultanali Financing, Inc. on a with recourse basis. Sultanali Financing will collect the receivables.
The receivables records are transferred to Sultanali Financing on August 15, 2008. Sultanali Financing assesses
a finance charge of 3% of the amount of accounts receivable and also reserves an amount equal to 5% of accounts
receivable to cover probable adjustments.
Instructions
(a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?
(b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2008, for Strassner to
record the sale of receivables, assuming the recourse obligation has a fair value of $3,000.
(LO 8)
E8-17B (Transfer of Receivables without Recourse) SYKES Corp. factors $100,000 of accounts receivable with KTT Finance Corporation on a without recourse basis on July 1, 2008. The receivables records are
transferred to KTT Finance, which will receive the collections. KTT Finance assesses a finance charge of 2% of
the amount of accounts receivable and retains an amount equal to 5% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
Instructions
(a) Prepare the journal entry on July 1, 2008, for SYKES Corp. to record the sale of receivables without recourse.
(b) Prepare the journal entry on July 1, 2008, for KTT Finance Corporation to record the purchase of receivables without recourse.
B Exercises
E8-18B
1.
2.
(Note Transactions at Unrealistic Interest Rates) On July 1, 2008, Taylor Inc. made two sales.
It sold land having a fair market value of $500,000 in exchange for a 4-year, zero-interest-bearing promissory note in the face amount of $732,053.70. The land is carried on Taylor’s books at a cost of $375,000.
It rendered services in exchange for a 4%, 8-year promissory note having a face value of $400,000 (interest
payable annually).
8-5
(LO 6,
7)
Taylor Inc. recently had to pay 7% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 10% interest.
Instructions
(a) Record the two journal entries that should be recorded by Taylor Inc. for the sales transactions above that
took place on July 1, 2008. (Round to the nearest dollar.)
(b) Assume that Taylor Inc. uses the fair value option for the note issued in exchange for the land. Prepare the
entry at December 31, 2008, if the fair value of the note is $480,000.
(Notes Receivable with Unrealistic Interest Rate) On December 31, 2006, Tran Co. performed
environmental consulting services for Hayden Co. Hayden was short of cash, and Tran Co. agreed to accept a
$100,000 zero-interest-bearing note due December 31, 2008, as payment in full. Hayden is somewhat of a credit
risk and typically borrows funds at a rate of 15%. Tran is much more creditworthy and has various lines of credit
at 8%.
E8-19B
(LO 6,
7)
Instructions
(a)
(b)
(c)
(d)
Prepare the journal entry to record the transaction of December 31, 2006, for Tran Co.
Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2007.
Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2008.
Assume that Tran Co. elects the fair value option for this note. Prepare the journal entry at December 31, 2007,
if the fair value of the note is $90,000.
(Basic Note and Accounts Receivable Transactions)
Part 1
On April 1, 2008, Depp Pirate Company, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Depp Pirate Company will receive interest at
the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on March 31, 2010.
E8-20B
(LO 5,
6, 7)
Instructions
(a) When should Depp Pirate Company report interest revenue from the note receivable? Discuss the rationale for
your answer.
(b) Briefly explain how Depp Pirate Company will apply the fair value option, if it is used to account for this note
receivable.
Part 2
On December 31, 2008, Depp Priate Company had significant amounts of accounts receivable as a result of credit
sales to its customers. Depp Pirate uses the allowance method based on the accounts receivable balance. Past experience indicates that 5% of the outstanding accounts receivable balance will not be collected. This pattern is expected
to continue.
Instructions
(a) Discuss the rationale for using the allowance method based on the accounts receivable balance to estimate bad
debts. Contrast this method with the allowance method based on credit sales.
(b) How should Depp Pirate Company report the allowance for doubtful accounts on its balance sheet at December
31, 2008? Also, describe the alternatives, if any, for presentation of bad debt expense in Depp Pirate Company’s
2008 income statement.
(AICPA adapted)
(Sale of Notes Receivable) Alba Inc. sells industrial equipment for a standard 2-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount
equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of
sale. All notes are to be collected in four equal annual installments beginning one-half year after sale. Some of
the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some
are retained by Alba. At year end, Alba evaluates all outstanding notes receivable and provides for estimated
losses arising from defaults.
E8-21B
(LO 7,
8)
8-6
Chapter 8
Cash and Receivables
Instructions
(a) What is the appropriate valuation basis for Alba’s notes receivable at the date it sells equipment?
(b) How should Alba account for the sale, without recourse, of a April 1, 2008, note receivable sold on May 1, 2008?
Why is it appropriate to account for it in this way?
(c) At December 31, 2008, how should Alba measure and account for the impact of estimated losses resulting from
notes receivable that it
(1) Retained and did not sell?
(2) Sold to bank with recourse?
(AICPA adapted)
(LO 8)
(Reporting of Notes Receivable, Interest, and Sale of Receivables) On October 1, 2008, Douglas
Fir Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from
the customer. Douglas Fir will receive interest at the prevailing rate for a note of this type. Both the principal and
interest are due in one lump sum on September 30, 2009.
On October 31, 2008, Douglas Fir sold special-order merchandise on credit and received in return a zero
interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on October 31, 2010.
Douglas Fir also has significant amounts of trade accounts receivable as a result of credit sales to its customers.
On October 1, 2008, other trade accounts receivable were sold on a with-recourse basis. The factor withheld 5% of
the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge
of 3%. The recourse liability can be estimated.
On December 1, 2008, some trade accounts receivable were assigned to Winter Finance Company on a non-notification (Douglas Fir handles collections) basis for an advance of 75% of their amount at an interest charge of 10%
on the balance outstanding.
E8-22B
Instructions
(a) How should Douglas Fir determine the interest revenue for 2008 on the:
(1) Interest-bearing note receivable? Why?
(2) Zero-interest-bearing note receivable? Why?
(b) How should Douglas Fir report the interest-bearing note receivable and the zero-interest-bearing note receivable
on its balance sheet at December 31, 2008?
(c) How should Douglas Fir account for the trade accounts receivable factored on October 1, 2008? Why?
(d) How should Douglas Fir account for subsequent collections on the trade accounts receivable assigned on
December 1, 2008, and the payments to Winter Finance? Why?
(AICPA adapted)
(LO 9)
(Analysis of Receivables) Presented below is information for Oliver and Company.
Beginning-of-the-year Accounts Receivable balance was $110,000.
Net sales (all on account) for the year were $653,000. Oliver and Company does not offer cash discounts.
Collections on accounts receivable during the year were $582,000.
E8-23B
1.
2.
3.
Instructions
(a) Prepare summary journal entries to record the items noted above.
(b) Compute Oliver and Company’s accounts receivable turnover ratio and its days to collect accounts receivable
for the year. The company does not believe it will have any bad debts.
(c) Use the turnover ratio computed in (b) to analyze Oliver and Company’s liquidity. The turnover ratio last year
was 8.0.
(LO 8)
(Transfer of Receivables) Use the information for Oliver and Company as presented in E8-23B. Oliver
and Company is planning to factor some accounts receivable at the end of the year. Accounts totaling $50,000 will
be transferred to Factors R Us, Inc. with recourse. Factors R Us will retain 10% of the balances for probable adjustments and assesses a finance charge of 5%. The fair value of the recourse obligation is $6,000.
E8-24B
Instructions
(a) Prepare the journal entry to record the sale of the receivables.
(b) Compute Oliver and Company’s accounts receivables turnover ratio for the year, assuming the receivables are
sold, and discuss how factoring of receivables affects the turnover ratio.
B Exercises
(Petty Cash) Velez, Inc. decided to establish a petty cash fund to help ensure internal control over
its small cash expenditures. The following information is available for the month of April.
E8-25B
1.
2.
(LO 10)
On April 1, it established a petty cash fund in the amount of $1,000.
A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as
follows.
Delivery charges paid on merchandise purchased
Supplies purchased and used
Postage expense
I.O.U. from employees
Miscellaneous expense
3.
8-7
$300
125
165
85
180
The petty cash fund was replenished on April 10. The balance in the fund was $135.
The petty cash fund balance was increased $500 to $1,500 on April 20.
Instructions
Prepare the journal entries to record transactions related to petty cash for the month of April.
E8-26B
(Petty Cash)
The petty cash fund Rodriguez Service, a sole proprietorship, contains the following.
1. Coins and currency
2. Postage stamps
3. An I.O.U. from James Olley, an employee,
for cash advance
4. Vouchers for the following:
Stamps
Lunch for working meeting
Paper
(LO 10)
$ 68.45
41.68
50.00
$50.00
36.44
21.56
108.00
$268.13
The general ledger account Petty Cash has a balance of $300.
Instructions
Prepare the journal entry to record the reimbursement of the petty cash fund.
E8-27B (Bank Reconciliation and Adjusting Entries) Wang Company deposits all receipts and makes all
payments by check. The following information is available from the cash records.
June 30 Bank Reconciliation
Balance per bank
Add: Deposits in transit
Deduct: Outstanding checks
$14,000
3,080
(4,000)
Balance per books
$13,080
Month of July Results
Balance July 31
July deposits
July checks
July note collected (not included in July deposits)
July bank service charge
July NSF check from a customer, returned by the bank
(recorded by bank as a charge)
Per Bank
Per Books
$17,300
10,000
8,000
2,000
30
670
$18,500
11,620
6,200
—
—
—
Instructions
(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.
(b) Prepare the general journal entry or entries to correct the Cash account.
(LO 10)
8-8
Chapter 8
(LO 10)
Cash and Receivables
(Bank Reconciliation and Adjusting Entries)
2008, bank statement, which is summarized below.
Norton Company has just received the October 31,
E8-28B
County National Bank
Disbursements
Balance, Oct. 1
Deposits during Oct.
Note collected for depositor,
including $120 interest
Checks cleared during Oct.
Bank service charges
Balance, Oct. 31
Receipts
Balance
$68,500
$15,356
83,856
1,500
$72,500
33
85,356
12,856
12,823
12,823
The general ledger Cash account contained the following entries for the month of October.
Cash
Balance, Oct. 1
Receipts during Oct.
16,500
76,000
Disbursements in Oct.
71,565
Deposits in transit at October 31 are $12,000, and checks outstanding at October 31 total $2,546. Cash on
hand at October 31 is $525. The bookkeeper improperly entered one check in the books at $750.00 which was
written for $350.00 for advertising (expense); it cleared the bank during the month of October.
Instructions
(a) Prepare a bank reconciliation dated October 31, 2008, 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 October 31 balance sheet?