ACCOUNTING FOR NOTES RECEIVABLE
4. Assume that Dusty Roads did not make the necessary principal and interest payment on
EXERCISE 7.13 Accounting for Marketable Securities E
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EXERCISE 7.14 Notes and Interest E
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Indicate the effects of the following errors on each of the items listed in the column headings below. Use the following symbols: O overstated, U understated, and NE no effect. Assume that the company does not use the direct write-off method to account for uncollectible accounts.
EXERCISE 7.12 Effects of Accounting Errors
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Gross Current Receivables Net Retained Working Transaction Profit Ratio Turnover Rate Income Earnings Capital
a. Recorded uncollectible accounts expense by debiting Sales and crediting Accounts Receivable.
b. Wrote off an account receivable deemed uncollectible by debiting Uncollectible Accounts Expense and crediting Accounts Receivable.
c. Collected cash from credit customers in settlement of outstanding accounts receivable by debiting Cash and crediting Sales.
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b. Indicate the effects of each of the four transactions journalized in part a on the elements of the financial statement shown below. Use the code letters I for increase, D for decrease, and NE for no effect.
Transaction Revenue Expenses Net Income Assets Liabilities Equity 1
The Home Depot, Inc., financial statements appear in Appendix A at the end of this textbook. Use these statements to answer the following questions:
a. What is the total dollar value of the company’s financial assets for the most current year reported?
b. Does the company report any investments in marketable securities? If so, how does it report unrealized gains and losses?
c. What is the company’s allowance for uncollectible accounts for the most current year reported? (Hint: Examine the footnotes to the financial statements.)
d. On average, for how many days do the company’s accounts receivable remain outstanding before collection?
Problem Set A
The cash transactions and cash balances of Banner, Inc., for July were as follows:
1. The ledger account for Cash showed a balance at July 31 of $125,568.
2. The July bank statement showed a closing balance of $114,828.
3. The cash received on July 31 amounted to $16,000. It was left at the bank in the night deposi- tory chute after banking hours on July 31 and therefore was not recorded by the bank on the July statement.
4. Also included with the July bank statement was a debit memorandum from the bank for $50 representing service charges for July.
5. A credit memorandum enclosed with the July bank statement indicated that a non-interest- bearing note receivable for $4,000 from Rene Manes, left with the bank for collection, had been collected and the proceeds credited to the account of Banner, Inc.
6. Comparison of the paid checks returned by the bank with the entries in the accounting records revealed that check no. 821 for $519, issued July 15 in payment for office equipment, had been erroneously entered in Banner’s records as $915.
7. Examination of the paid checks also revealed that three checks, all issued in July, had not yet been paid by the bank: no. 811 for $314; no. 814 for $625; no. 823 for $175.
8. Included with the July bank statement was a $200 check drawn by Howard Williams, a cus- tomer of Banner, Inc. This check was marked “NSF.” It had been included in the deposit of July 27 but had been charged back against the company’s account on July 31.
Instructions
a. Prepare a bank reconciliation for Banner, Inc., at July 31.
b. Prepare journal entries (in general journal form) to adjust the accounts at July 31. Assume that the accounts have not been closed.
c. State the amount of cash that should be included in the balance sheet at July 31.
d. Explain why the balance per the company’s bank statement is often larger than the balance shown in its accounting records.
EXERCISE 7.15 Using the Financial Statements of Home Depot, Inc.
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Problem Set A accounting
PROBLEM 7.1A Bank Reconciliation P
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Confirming Pages
Problem Set A 325
Osage Farm Supply had poor internal control over its cash transactions. Facts about the company’s cash position at November 30 are described below.
The accounting records showed a cash balance of $35,400, which included a deposit in transit of $1,245. The balance indicated in the bank statement was $20,600. Included in the bank state- ment were the following debit and credit memoranda:
Debit Memoranda:
Check from customer G. Davis, deposited by Osage Farm
Supply, but charged back as NSF. . . $ 130 Bank service charges for November. . . 15 Credit Memorandum:
Proceeds from collection of a note receivable from Regal Farms, which Osage Farm Supply
had left with the bank’s collection department . . . $6,255
Outstanding checks were as follows:
Check No. Amount
8231 . . . $ 400 8263 . . . 524 8288 . . . 176 8294 . . . 5,000
Bev Escola, the company’s cashier, has been taking portions of the company’s cash receipts for several months. Each month, Escola prepares the company’s bank reconciliation in a manner that conceals her thefts. Her bank reconciliation for November was as follows:
Balance per bank statement, Nov. 30 . . . $20,600 Add: Deposits in transit. . . $2,145
Collection of note from Regal Farms . . . 6,255 8,400 Subtotal . . . $30,000 Less: Outstanding checks:
No. 8231 . . . $ 400 8263 . . . 524
8288 . . . 176 1,000 Adjusted cash balance per bank statement . . . $29,000 Balance per accounting records, Nov. 30. . . $35,400 Add: Credit memorandum from bank . . . 6,255 Subtotal . . . $29,145 Less: Debit memoranda from bank:
NSF check of G. Davis . . . $ 130
Bank service charges . . . 15 145 Adjusted cash balance per accounting records . . . $29,000
Instructions
a. Determine the amount of the cash shortage that has been concealed by Escola in her bank rec- onciliation. (As a format, we suggest that you prepare the bank reconciliation correctly. The PROBLEM 7.2A
Protecting Cash P
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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 Escola’s bank reconciliation and explain in detail how she 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 the shortage determined in part a.
c. Suggest some specific internal control measures that appear to be necessary for Osage Farm Supply.
Super Star, a Hollywood publicity 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 . . . 210,000 c. 31–60 days past due . . . 80,000 d. 61–90 days past due . . . 15,000 e. Over 90 days past due. . . 30,000 Total . . . $835,000
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 adjustment at December 31 showed a credit bal- ance of $11,800.
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.
c. Assume that on January 10 of the following year, Super Star learned that an account receiv- able that had originated on September 1 in the amount of $8,250 was worthless because of the bankruptcy of the client, April Showers. Prepare the journal entry required on January 10 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?
Wilcox Mills is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $30 million. At the end of 2010, accounts receivable were presented in the com- pany’s balance sheet as follows:
Accounts receivable from clients . . . $3,100,000 Less: Allowance for doubtful accounts . . . 80,000
During 2011, $165,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $15,000 were subsequently collected. At the end of 2011, an aging of accounts receivable indicated a need for a $90,000 allowance to cover possible failure to collect the accounts currently outstanding.
Wilcox Mills makes adjusting entries for uncollectible accounts only at year-end.
PROBLEM 7.3A Aging Accounts Receivable;
Write-offs P
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PROBLEM 7.4A Accounting for Uncollectible Accounts P A LO1
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Confirming Pages
Problem Set A 327
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.