ACCOUNTING FOR NOTES RECEIVABLE
3. The adjusting entry required at December 31, 2011, to increase the Allowance for Doubt-
b. Notice that the Allowance for Doubtful Accounts was only $80,000 at the end of 2010, but uncollectible accounts during 2011 totaled $150,000 ($165,000 less the $15,000 reinstated).
Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2010? Explain.
At December 31, 2010, Weston Manufacturing Co. owned the following investments in capital stock of publicly traded companies (classified as available-for-sale securities):
Cost Current Market Value Footlocker, Inc. (5,000 shares: cost,
$17 per share; market value, $20). . . $ 85,000 $100,000 The Gap, Inc. (4,000 shares: cost, $17
per share; market value, $15) . . . 68,000 60,000
$153,000 $160,000
In 2011, Weston engaged in the following two transactions:
Apr. 10 Sold 1,000 shares of its investment in Footlocker, Inc., at a price of $21 per share, less a brokerage commission of $50.
Aug. 7 Sold 2,000 shares of its investment in The Gap, Inc., at a price of $14 per share, less a brokerage commission of $60.
At December 31, 2011, the market values of these stocks were: Footlocker, Inc., $18 per share;
and The Gap, Inc., $16 per share.
Instructions
a. Illustrate the presentation of marketable securities and the unrealized holding gain or loss in Weston’s balance sheet at December 31, 2010. Include a caption indicating the section of the balance sheet in which each of these accounts appears.
b. Prepare journal entries to record the transactions on April 10 and August 7.
c. Prior to making a fair value adjustment at the end of 2011, determine the unadjusted bal- ance in the Marketable Securities control account and the Unrealized Holding Gain (or Loss) on Investments account. (Assume that no unrealized gains or losses have been rec- ognized since last year.)
d. Prepare a schedule showing the cost and the market values of securities owned at the end of 2011. (Use the same format as the schedule illustrated above.)
e. Prepare the fair value adjusting entry required at December 31, 2011.
f. Illustrate the presentation of the marketable securities and unrealized holding gain (or loss) in the balance sheet at December 31, 2011. (Follow the same format as in part a. )
g. Illustrate the presentation of the net realized gains (or losses) in the 2011 income statement.
Assume a multiple-step income statement and show the caption identifying the section in which this amount would appear.
h. Explain how both the realized and unrealized gains and losses will affect the company’s 2011 income tax return.
PROBLEM 7.5A Accounting for Marketable Securities P
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Eastern Supply sells a variety of merchandise to retail stores on account, but it insists that any customer who fails to pay an invoice when due must replace their account receivable with an interest- bearing note. The company adjusts and closes its accounts at December 31. Among the transactions relating to notes receivable were the following:
Sept. 1 Received from a customer (Party Plus) a nine-month, 10 percent note for $75,000 in settlement of an account receivable due today.
June 1 Collected in full the nine-month, 10 percent note receivable from Party Plus, including interest.
Instructions
a. Prepare journal entries (in general journal form) to record: (1) the receipt of the note on September 1; (2) the adjustment for interest on December 31; and (3) collection of principal and interest on June 1. (To better illustrate the allocation of interest revenue between account- ing periods, we will assume Eastern Supply makes adjusting entries only at year-end. ) b. Assume that instead of paying the note on June 1, the customer (Party Plus) had defaulted.
Give the journal entry by Eastern Supply to record the default. Assume that Party Plus has sufficient resources that the note eventually will be collected.
c. Explain why the company insists that any customer who fails to pay an invoice when due must replace it with an interest-bearing note.
The Scooter Warehouse provided the following information at December 31, 2011:
Bank Reconciliation
General ledger cash Bank statement balance,
balance, 12/31/11 . . . $17,566 12/31/11. . . $16,306 Bank service charge . . . (25) Deposits in transit . . . 2,450 Returned customer checks Outstanding checks . . . . (1,356) marked NSF . . . (375)
Error in recording of office
supplies . . . 234
Adjusted cash balance, Adjusted cash balance,
12/31/11 . . . $17,400 12/31/11. . . $17,400 Marketable Securities
The company invested $26,000 in a portfolio of marketable securities on December 22, 2011. The portfolio’s market value on December 31, 2011, had increased in value to $28,500.
Notes Receivable
On November 1, 2011, The Scooter Warehouse sold 25 scooters to Bermuda Fantasy Resort for
$65,000. The resort paid $5,000 at the point of sale and issued a one-year, $60,000, 5 percent note for the remaining balance. The note, plus accrued interest, is due in full on October 31, 2012. The Scooter Warehouse adjusts for accrued interest revenue monthly.
Accounts Receivable
The Scooter Warehouse uses a balance sheet approach to account for uncollectible accounts expense. Outstanding accounts receivable on December 31, 2011, total $450,000. After aging these accounts, the company estimates that their net realizable value is $435,000. Prior to making any adjustment to record uncollectible accounts expense, The Scooter Warehouse’s Allowance for Doubtful Accounts has a credit balance of $4,000.
Instructions
a. Prepare the journal entry necessary to update the company’s accounts immediately after per- forming its bank reconciliation on December 31, 2011.
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Problem Set A 329
b. Prepare the journal entry necessary to adjust the company’s marketable securities to market value at December 31, 2011.
c. Prepare the journal entry necessary to accrue interest in December 2011.
d. Prepare the journal entry necessary to report the company’s accounts receivable at their net realizable value at December 31, 2011.
e. Discuss briefly how the entry performed in part d affects the accounts receivable turnover rate.
Does the write-off of an account receivable affect the accounts receivable turnover rate differ- ently than the entry performed in part d ? Explain.
The Cash account in the general ledger of Hendry Corporation shows a balance of $96,990 at December 31, 2011 (prior to performing a bank reconciliation). The company’s bank statement shows a balance of $100,560 at the same date. An examination of the bank statement reveals the following:
1. Deposits in transit amount to $24,600.
2. Bank service charges total $200.
3. Outstanding checks total $31,700.
4. A $3,600 check marked “NSF” from Kent Company (one of Hendry Corporation’s customers) was returned to Hendry Corporation by the bank. This was the only NSF check that Hendry Corporation received during 2011.
5. A canceled check (no. 244) written by Hendry Corporation in the amount of $1,250 for office equipment was incorrectly recorded in the general ledger as a debit to Office Equipment of
$1,520, and a credit to Cash of $1,520.
In addition to the above information, Hendry Corporation owns the following assets at December 31, 2011: (1) money market accounts totaling $75,000, (2) $3,000 of high-grade, 90-day, commer- cial paper, and (3) highly liquid stock investments valued at $86,000 at December 31, 2011 (these investments originally cost Hendry Corporation $116,000).
On December 1, 2011, Hendry Corporation sold an unused warehouse to Moran Industries for
$100,000. Hendry accepted a six-month, $100,000, 6 percent note receivable from Moran. The note, plus accrued interest, is due in full on May 31, 2012. Hendry Corporation adjusts for accrued interest revenue monthly.
Hendry Corporation uses the income statement approach to compute its uncollectible accounts expense. The general ledger had reported Accounts Receivable of $2,150,000 at January 1, 2011.
At that time, the Allowance for Doubtful Accounts had a credit balance of $40,000. Throughout 2011, the company wrote off actual accounts receivable of $140,000 and collected $21,213,600 on account from credit customers (this amount includes the $3,600 NSF check received from Kent Company). Credit sales for the year ended December 31, 2011, totaled $20,000,000. Of these credit sales, 2 percent were estimated to eventually become uncollectible.
Instructions
a. Prepare Hendry Corporation’s bank reconciliation dated December 31, 2011, and provide the journal entry necessary to update the company’s general ledger balances.
b. Compute cash and cash equivalents to be reported in Hendry Corporation’s balance sheet dated December 31, 2011.
c. Prepare the adjusting entry necessary to account for the note receivable from Moran Industries at December 31, 2011.
d. Determine the net realizable value of Hendry Corporation’s accounts receivable at December 31, 2011.
e. Determine the total dollar amount of financial assets to be reported in Hendry Corporation’s balance sheet dated December 31, 2011.
f. Assume that it is normal for firms similar to Hendry Corporation to take an average of 45 days to collect an outstanding receivable. Is Hendry Corporation’s collection performance above or below this average?
PROBLEM 7.8A Short Comprehensive Problem
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Problem Set B
The cash transactions and cash balances of Dodge, Inc., for November were as follows:
1. The ledger account for Cash showed a balance at November 30 of $6,750.
2. The November bank statement showed a closing balance of $4,710.
3. The cash received on November 30 amounted to $3,850. It was left at the bank in the night depository chute after banking hours on November 30 and therefore was not recorded by the bank on the November statement.
4. Also included with the November bank statement was a debit memorandum from the bank for
$15 representing service charges for November.
5. A credit memorandum enclosed with the November bank statement indicated that a non- interest-bearing note receivable for $4,000 from Wright Sisters, left with the bank for collec- tion, had been collected and the proceeds credited to the account of Dodge, Inc.
6. Comparison of the paid checks returned by the bank with the entries in the accounting records revealed that check no. 810 for $430, issued November 15 in payment for computer equip- ment, had been erroneously entered in Dodge’s records as $340.
7. Examination of the paid checks also revealed that three checks, all issued in November, had not yet been paid by the bank: no. 814 for $115; no. 816 for $170; no. 830 for $530.
8. Included with the November bank statement was a $2,900 check drawn by Steve Dial, a cus- tomer of Dodge, Inc. This check was marked “NSF.” It had been included in the deposit of November 27 but had been charged back against the company’s account on November 30.
Instructions
a. Prepare a bank reconciliation for Dodge, Inc., at November 30.
b. Prepare journal entries (in general journal form) to adjust the accounts at November 30.
Assume that the accounts have not been closed.
c. State the amount of cash that should be included in the balance sheet at November 30.
Jason Chain Saws, Inc., had poor internal control over its cash transactions. Facts about the company’s cash position at April 30 are described below.
The accounting records showed a cash balance of $20,325, which included a deposit in tran- sit of $5,000. The balance indicated in the bank statement was $14,300. Included in the bank statement were the following debit and credit memoranda:
Debit Memoranda:
Check from customer, deposited
but charged back as NSF . . . $ 125 Bank service charges for April . . . 50 Credit Memorandum:
Proceeds from collection of a note receivable on company’s behalf . . . $6,200
Outstanding checks as of April 30 were as follows:
Check No. Amount
836 . . . $ 500 842 . . . 440 855 . . . 330 859 . . . 1,300
Problem Set B
PROBLEM 7.1B Bank Reconciliation P
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PROBLEM 7.2B Protecting Cash P
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Problem Set B 331
Tom Crook, the company’s cashier, has been taking portions of the company’s cash receipts for several months. Each month, Crook prepares the company’s bank reconciliation in a manner that conceals his thefts. His bank reconciliation for April is illustrated as follows:
Balance per bank statement, April 30. . . $14,300 Add: Deposits in transit. . . $7,120
Collection of note . . . 6,200 13,320 Subtotal . . . $27,620 Less: Outstanding checks:
No. 836 . . . $ 500 No. 842 . . . 440
No. 855 . . . 330 1,270 Adjusted cash balance per bank statement . . . $26,350 Balance per accounting records, April 30. . . 20,325 Add: Credit memorandum from bank . . . 6,200 Subtotal . . . $26,525 Less: Debit memoranda from bank:
NSF check . . . $ 125
Bank service charges . . . 50 175 Adjusted cash balance per accounting records . . . $26,350
Instructions
a. Determine the amount of cash shortage that has been concealed by Crook in his bank rec- onciliation. (As a format, we suggest that you prepare the bank reconciliation correctly. The amount of the shortage then will be the difference between the adjusted balances per the bank statement and per the accounting records. You can then list this unrecorded cash shortage as the final adjustment necessary to complete your reconciliation.)
b. Carefully review Crook’s bank reconciliation and explain in detail how he concealed the amount of the shortage. Include a listing of the dollar amounts that were concealed in various ways. This listing should total the amount of shortage determined in part a.
c. Suggest some specific internal control measures that appear to be necessary for Jason Chain Saws, Inc.
Starlight, a Broadway media firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year-end an aging of the accounts receivable produced the following five groupings:
a. Not yet due. . . $500,000 b. 1–30 days past due . . . 110,000 c. 31–60 days past due . . . 50,000 d. 61–90 days past due . . . 30,000 e. Over 90 days past due. . . 60,000 Total . . . $750,000
On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group b, 3 percent; Group c, 10 percent; Group d, 20 percent; and Group e, 50 percent.
The Allowance for Doubtful Accounts before adjustments at December 31 showed a credit bal- ance of $4,700.
Instructions
a. Compute the estimated amount of uncollectible accounts based on the above classification by age groups.
b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount.
PROBLEM 7.3B Aging Accounts Receivable;
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c. Assume that on January 18 of the following year, Starlight learned that an account receivable that had originated on August 1 in the amount of $1,600 was worthless because of the bank- ruptcy of the client, May Flowers. Prepare the journal entry required on January 18 to write off this account.
d. The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest-bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?
Walc Factory is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $20 million. At the end of 2010, accounts receivable were presented in the com- pany’s balance sheet as follows:
Accounts receivable from clients . . . $1,800,000 Less: Allowance for doubtful accounts . . . 40,000
During 2011, $115,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $9,000 were subsequently collected. At the end of 2011, an aging of accounts receivable indicated a need for a $75,000 allowance to cover possible failure to collect the accounts currently outstanding.
Walc Factory makes adjusting entries for uncollectible accounts only at year-end.
Instructions
a. Prepare the following general journal entries:
1. One entry to summarize all accounts written off against the Allowance for Doubtful Accounts during 2011.