EXERCISE 7-8 (510 minutes)

(a)

Allowance for Doubtful Accounts ..................................

8,000
Accounts Receivable .............................................

8,000

(b)

Accounts Receivable ......................................................

Less: Allowance for Doubtful Accounts .......................
Net realizable value ................................................

$900,000
40,000
$860,000

(c)

Accounts Receivable ......................................................

Less: Allowance for Doubtful Accounts .......................
Net realizable value ................................................

$892,000
32,000
$860,000

EXERCISE 7-9 (810 minutes)

(a)

(b)

Bad Debt Expense ...........................................................

4,950
Allowance for Doubtful Accounts
($80,000 X 4%) + $1,750 = $4,950.......................

4,950

Bad Debt Expense ...........................................................

5,800
Allowance for Doubtful Accounts
$580,000 X 1% = $5,800 ......................................

5,800

EXERCISE 7-10 (1012 minutes)

(a)

The direct write-off approach is not theoretically justifiable even

though required for income tax purposes. The direct write-off
method does not match expenses with revenues of the period,
nor does it result in receivables being stated at estimated
realizable value on the balance sheet.

(b)

Bad Debt Expense 2% of Sales = $48,000 ($2,400,000 X 2%)

Bad Debt Expense Direct Write-Off = $34,330 ($7,800 + $9,700 +
$7,000 + $9,830)
Net income would be $13,670 ($48,000 $34,330) lower under
the
percentage-of-sales approach.

EXERCISE 7-11 (810 minutes)

Balance 1/1 ($700 $255)
4/12 (#2412) ($1,710 $1,000 $400*)
11/18 (#5681) ($2,000 $1,250)

$ 445 Over one year

310 Eight months and 19 days
750 One month and 13 days
$1,505

*($890 $490)
Inasmuch as later invoices have been paid in full, all three of these
amounts should be investigated in order to determine why Alstott Co.
has not paid them. The amounts in the beginning balance and #2412
should be of particular concern.
EXERCISE 7-12 (1520 minutes)
7/1 Accounts Receivable (Legler Co.)..................................
9,800
Sales ($10,000 X 98%) ............................................

9,800

7/5 Cash [$12,000 X (1 .09)]................................................

10,920
Loss on Sale of Receivables ..........................................
1,080
Accounts Receivable ($12,000 X 98%) ..................
Sales Discounts Forfeited .....................................

11,760
240

(Note: It is possible that the company already recorded the Sales

Discounts Forfeited. In this case, the credit to Accounts
Receivable would be for $12,000. The same point applies to the
next entry as well.)
7/9

7/11

Accounts Receivable .......................................................

180
Sales Discounts Forfeited
($9,000 X 2%) .......................................................

180

Cash ..................................................................................
5,640
Interest Expense ($6,000 X 6%).......................................
360
Notes Payable .........................................................

6,000

Accounts Receivable (Legler Co.) ..................................

200
Sales Discounts Forfeited
($10,000 X 2%) ......................................................

200

EXERCISE 7-12 (Continued)

This entry may be made at the next time financial statements are
prepared. Also, it may occur on 12/29 when Legler Companys
receivable is adjusted.
12/29 Allowance for Doubtful Accounts ...................................
9,000
Accounts Receivable (Legler Co.)
[$ 9,800 + $200 = $10,000;
$10,000 (10% X $10,000) = $9,000] ..................

9,000

EXERCISE 7-13 (1015 minutes)

(a)

Cash .................................................................................
290,000
Interest Expense .............................................................
10,000*
Notes Payable.........................................................

300,000

*2% X $500,000 = $10,000

(b)
(c)

Cash .................................................................................
350,000
Accounts Receivable .............................................

350,000

Notes Payable ..................................................................

300,000
Interest Expense .............................................................
7,500*
Cash ........................................................................

307,500

*10% X $300,000 X 3/12 = $7,500

EXERCISE 7-14 (1518 minutes)
1.

2.

Cash .................................................................................
18,000
Loss on Sale of Receivables
($20,000 X 10%) ............................................................
2,000
Accounts Receivable .............................................

20,000

Cash .................................................................................
50,600
Interest Expense ($55,000 X 8%) ....................................
4,400
Notes Payable .........................................................

55,000

EXERCISE 7-14 (Continued)

3.

4.

Bad Debt Expense ...........................................................

5,850
Allowance for Doubtful Accounts
[($82,000 X 5%) + $1,750] ....................................
Bad Debt Expense ...........................................................
6,450
Allowance for Doubtful Accounts
($430,000 X 1.5%) ................................................

5,850

6,450

EXERCISE 7-15 (1015 minutes)

Computation of net proceeds:
Cash received .................................................................
Less: Recourse liability ................................................
Net proceeds...................................................................

$190,000
2,000
$188,000

Computation of gain or loss:

Carrying value ...................................................
Net proceeds .....................................................
Loss on sale of receivables .............................

$200,000
188,000
$ 12,000

The following journal entry would be made:

Cash......................................................................... $190,000
Loss on Sale of Receivables .................................. 12,000
Recourse Liability ...........................................
Accounts Receivable ......................................

2,000
200,000

EXERCISE 7-16 (1520 minutes)

(a) To be recorded as a sale, all of the following conditions would be met:
1.

The transferred asset has been isolated from the transferor (put
beyond reach of the transferor and its creditors).

2.

The transferees have obtained the right to pledge or to exchange

either the transferred assets or beneficial interests in the transferred assets.

EXERCISE 7-16 (Continued)

3.

The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them
before their maturity.

(b) Computation of net proceeds:

Cash received ($250,000 X 94%) .................
Due from factor ($250,000 X 4%) .................
Less: Recourse obligation..........................
Net proceeds ................................................

$235,000
10,000

Computation of gain or loss:

Carrying value ............................................
Net proceeds ..............................................
Loss on sale of receivables ......................
The following journal entry would be made:
Cash ........................................................................
$235,000
Due from Factor .....................................................
10,000
Loss on Sale of Receivables .................................8,000
Recourse Liability ..........................................
Accounts Receivable .....................................

$245,000
3,000
$242,000
$250,000
242,000
$ 8,000

3,000
250,000

EXERCISE 7-17 (1015 minutes)

(a) July 1

Cash .................................................................................
378,000
Due from Factor...............................................................
16,000*
Loss on Sale of Receivables ..........................................
6,000**
Accounts Receivable .............................................

400,000

**(4% X $400,000) = $16,000

**(1 1/2% X $400,000) = $6,000
(b) July 1

Accounts Receivable ......................................................

400,000
Due to Customer (SEK Corp.) ...............................
Interest Revenue ....................................................
Cash ........................................................................

16,000
6,000
378,000

EXERCISE 7-18 (1015 minutes)

1.

7/1/12

Notes Receivable ............................................................

1,416,163
Discount on Notes Receivable ............................... 516,163
Land ......................................................................... 590,000
Gain on Disposal of Land
($900,000 $590,000) ................
310,000
Computation of the discount
$1,416,163 Face value of note
.63552 Present value of 1 for 4 periods at 12%
$ 900,000 Present value of note
1,416,163 Face value of note
$ 516,163 Discount on notes receivable

2.

7/1/12

Notes Receivable ............................................................

400,000.00
Discount on Notes Receivable ...............................
178,836.32
Service Revenue ......................................................
221,163.68

Computation of the present value of the note:

Maturity value ...........................................................
$400,000.00
Present value of $400,000 due in
8 years at 12%$400,000 X .40388 .....................
$161,552.00
Present value of $12,000
payable annually for 8 years at
12% annually$12,000 X 4.96764 ........................
59,611.68
Present value of the note .........................................
221,163.68
Discount on notes receivable..................................
$178,836.32

EXERCISE 7-19 (2025 minutes)

(a)

Notes Receivable ............................................................

300,000
Discount on Notes Receivable ..............................
Service Revenue ....................................................

52,065
247,935*

*Computation of present value of note:

PV of $300,000 due in 2 years at 10%
$300,000 X .82645 = $247,935
(b)

Discount on Notes Receivable........................................

24,794
Interest Revenue ....................................................

24,794*

*$247,935 X 10% = $24,794

(c)

Discount on Notes Receivable........................................

27,271*
Interest Revenue .....................................................

27,271

*$52,065 $24,794
Cash..................................................................................
300,000
Notes Receivable ...................................................
(d)

Notes Receivable .............................................................

22,271
Unrealized Holding Gain or
LossIncome .....................................................

300,000

22,271*

*Note Receivable, net ......................................

Amortization, 12/31/12 ................................
Book Value, 12/31/12 ......................................

$247,935
24,794
272,729

Fair Value ........................................................

Carrying Value ................................................
Unrealized Gain ..............................................

$295,000
(272,729)
$ 22,271