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Quick Study 7-4 (15 minutes)

Dec. 31 Bad Debts Expense ................................................ 1,400


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

1,400

To record estimate of uncollectibles


($280,000 x 0.5%).

Exercise 7-4 (20 minutes)


Dec. 31 Bad Debts Expense ..................................................... 4,875
Allowance for Doubtful Accounts........................

4,875

To record estimated bad debts expense


(.005 x $975,000).

Dec. 31 Bad Debts Expense...............................................


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

4,500
4,500

To record estimated bad debts


[$300,000 x .015].

Exercise 7-6 (30 minutes)


a. Computation of the estimated balance of the allowance for uncollectibles:
Not due:
1 to 30:
31 to 60:
61 to 90:
Over 90:

$396,000 x 0.01 =
90,000 x 0.02 =
36,000 x 0.05 =
18,000 x 0.07 =
30,000 x 0.10 =

$ 3,960
1,800
1,800
1,260
3,000
$11,820 credit

Exercise 7-7 (25 minutes)


a. Computation of the estimated balance of the allowance for uncollectibles:
$570,000 x 0.045 =

$25,650 credit

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document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 7

417

b.
Dec. 31 Bad Debts Expense.............................................. 13,650
Allowance for Doubtful Accounts ................

13,650

To record estimated bad debts.*


*

Unadjusted balance ...........................


Estimated balance .............................

$12,000 credit
25,650 credit

Required adjustment .........................

$13,650 credit

c.
Dec. 31 Bad Debts Expense.............................................. 26,650
Allowance for Doubtful Accounts ................
To record estimated bad debts.*
*

Unadjusted balance ...........................


Estimated balance .............................

$ 1,000 debit
25,650 credit

Required adjustment .........................

$26,650 credit

26,650

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

418

Financial & Managerial Accounting, 5th Edition

Exercise 7-4 (20 minutes)


Dec. 31 Bad Debts Expense ..................................................... 4,875
Allowance for Doubtful Accounts........................

4,875

To record estimated bad debts expense


(.005 x $975,000).

Feb. 1 Allowance for Doubtful Accounts..............................


Accounts ReceivableP. Park ............................

580
580

To write off an account.

June 5 Accounts ReceivableP. Park ..................................


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

580
580

To reinstate an account.

June 5 Cash ..............................................................................


Accounts ReceivableP. Park ............................

580
580

To record cash received on account.

Exercise 7-9 (25 minutes)


a. Expense is 1.5% of credit sales
Dec. 31 Bad Debts Expense...............................................
Allowance for Doubtful Accounts .................

4,500
4,500

To record estimated bad debts


[$300,000 x .015].
The more advanced student might see that an abnormal $500 debit ($5,000 debit less
$4,500 credit) remains in the Allowance account; an instructor might desire to explain how
a company would likely alter its percent of sales estimate given an abnormal balance.

b. Expense is 0.5% of total sales


Dec. 31 Bad Debts Expense...............................................
Allowance for Doubtful Accounts .................

6,000
6,000

To record estimated bad debts


[($300,000 + $900,000) x .005].

c. Allowance is 6% of accounts receivable


Dec. 31 Bad Debts Expense............................................... 12,500
Allowance for Doubtful Accounts .................
To record estimated bad debts.*

12,500

Unadjusted balance ........................................................


$ 5,000 debit.
Estimated balance ($125,000 x 6%) ..............................
7,500 credit
Required adjustment ......................................................
$12,500 credit

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 7

419

Exercise 7-5 (15 minutes)


a.
Dec. 31 Bad Debts Expense* ..................................................... 685
Allowance for Doubtful Accounts........................

685

To record estimated bad debts expense.


*

Unadjusted balance
Estimated balance ($55,000 x .02)
Required adjustment

= $ 415
= 1,100
= $ 685

credit
credit
credit

b.
Dec. 31 Bad Debts Expense** ....................................................1,391
Allowance for Doubtful Accounts........................

1,391

To record estimated bad debts expense.


**

Unadjusted balance
Estimated balance ($55,000 x .02)
Required adjustment

= $ 291
= 1,100
= $1,391

debit
credit
credit

Problem 7-4B (35 minutes)


Part 1
Calculation of the estimated balance of the allowance
Not due: $396,400 x .020 = $ 7,928
1 to 30: 277,800 x .040 = 11,112
31 to 60:
48,000 x .085 =
4,080
61 to 90:
6,600 x .390 =
2,574
Over 90:
2,800 x .820 =
2,296
$27,990
Part 2
Dec. 31 Bad Debts Expense........................................... 31,390
Allowance for Doubtful Accounts .............
To record estimated bad debts.
*

31,390

Unadjusted balance ...........................


$ 3,400 debit
Estimated balance ..............................
27,990 credit
Required adjustment .........................
$31,390 credit

Part 3
Writing off the account receivable in 2014 will not directly affect Year 2014 net income.
The entry to write off an account involves a debit to Allowance for Doubtful Accounts
and a credit to Accounts Receivable, both of which are balance sheet accounts. Net
income is affected only by the annual recognition of the estimated bad debts expense,
which is journalized as an adjusting entry. Net income for Year 2013 (the year of the
original sale) included an estimated expense for write-offs such as this one.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

420

Financial & Managerial Accounting, 5th Edition

Problem 7-2B (35 minutes)


2012
a.

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


Sales ..............................................................

685,350
685,350

To record sales on account.

Cost of Goods Sold ......................................................


500,000
Merchandise Inventory ..........................................

500,000

To record cost of sales.

b.

Cash .....................................................................
Accounts Receivable ...................................

482,300
482,300

To record cash received on account.

c.

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


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

9,350
9,350

To record write-off of accounts.

d.

Bad Debts Expense ............................................


Allowance for Doubtful Accounts...............
To record estimated bad debts.

11,287
11,287

*Beginning receivables ....................


Credit sales ......................................
Collections .......................................
Write-offs .........................................
Ending receivables ..........................
Percent uncollectible ......................
Required ending allowance ............
Unadjusted balance.........................
Adjustment to the allowance ..........

$
0
685,350
(482,300)
(9,350)
193,700
x 1.0%
1,937**
9,350
$ 11,287

Cr.
Dr.
Cr.

** Rounded to nearest dollar

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 7

421

Problem 7-2B (Concluded)


2013
e.

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


Sales ...............................................................

870,220
870,220

To record sales on account.

Cost of Goods Sold ......................................................


650,000
Merchandise Inventory ..........................................

650,000

To record cost of sales.

f.

Cash ......................................................................
Accounts Receivable ....................................

990,800
990,800

To record cash received on account.

g.

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


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

11,090
11,090

To record write-off of accounts.

h.

Bad Debts Expense .............................................


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

9,773
9,773

To record estimated bad debts.*


*Beginning receivables ..........................
Credit sales ............................................
Collections .............................................
Write-offs ...............................................
Ending receivables ................................
Percent uncollectible ............................
Required ending allowance ..................
Unadjusted balance
Beginning (credit) ................................
$ 1,937
Write-offs (debit) ..................................
11,090
Adjustment to the allowance ................

$ 193,670
870,220
(990,800)
(11,090)
62,000
x 1.0%
620 Cr.

9,153 Dr.
9,773 Cr.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

422

Financial & Managerial Accounting, 5th Edition

Exercise 7-11 (15 minutes)


Nov. 1 Notes ReceivableK. White .............................
Accounts ReceivableK. White .................

6,000

Dec. 31 Interest Receivable ............................................


Interest Revenue ..........................................

80

6,000

80

To record interest earned


[$6,000 x .08 x 60/360].

Apr. 30 Cash ....................................................................


Notes ReceivableK. White .......................
Interest Revenue* .........................................
Interest Receivable ......................................

6,240
6,000
160
80

To record cash received on note plus


interest earned. *[$6,000 x .08 x 120/360]

Exercise 7-12 (20 minutes)


Mar. 21 Notes ReceivableT. Jackson ............................ 9,500
Accounts ReceivableT. Jackson ................

9,500

Sept. 17 Accounts ReceivableT. Jackson ...................... 9,880


Interest Revenue .............................................
Notes ReceivableT. Jackson ......................

380
9,500

To record note dishonored plus interest


earned [$9,500 x .08 x 180/360 = $380].

Dec. 31 Allowance for Doubtful Accounts ....................... 9,880


Accounts ReceivableT. Jackson ................

9,880

Exercise 7-13 (10 minutes)


Instructor note: The first printing of the book for the December 13 transaction erroneously
read 60-day note, but should have read 45-day note. This does not impact Exercise 13, but
does impact the January 27 entry for Exercise 14.

2012
Dec. 13

Dec. 31

Notes ReceivableM. Lee...........................


Accounts ReceivableM. Lee ..............
To record receipt of note on account.

9,500

Interest Receivable ......................................


Interest Revenue ....................................

38

9,500

38

To record interest earned [$9,500 x .08 x 18/360].


2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 7

423

Exercise 7-14 (15 minutes)


Instructor note: The first printing of the book for the December 13 transaction of Exercise 13
erroneously read 60-day note, but should have read 45-day note. This does not impact
Exercise 13, but does impact the January 27 entry for Exercise 14. An erroneous marginal
check figure of Dr. Cash 9,627 should correctly read Dr. Cash 9,595.

2013
Jan. 27 Cash ....................................................................... 9,595
Interest Revenue* ............................................
Interest Receivable .........................................
Notes ReceivableM. Lee .............................

57
38
9,500

To record cash received on note plus interest.


* [$9,500 x .08 x (45-18)/360 = $57]

Mar. 3 Notes ReceivableTomas Co. ............................ 5,000


Accounts Receivable-Tomas Co ...................

5,000

To record receipt of note on account.

17 Notes ReceivableH. Cheng ............................... 2,000


Accounts ReceivableH. Cheng ..................

2,000

To record receipt of note on account.

Apr. 16 Accounts ReceivableH. Cheng ........................ 2,015


Interest Revenue .............................................
Notes ReceivableH. Cheng .........................

15
2,000

To record receivable for dishonored


note plus interest [$2,000 x .09 x 30/360].

May 1 Allowance for Doubtful Accounts ....................... 2,015


Accounts ReceivableH. Cheng ..................

2,015

To write off account.

June 1 Cash ....................................................................... 5,125


Interest Revenue .............................................
Notes ReceivableTomas Co .......................

125
5,000

To record cash received on note with


interest [$5,000 x .10 x 90/360].

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

424

Financial & Managerial Accounting, 5th Edition

Exercise 7-10 (20 minutes)


July 4 Accounts Receivable ............................................ 7,245
Sales .................................................................

7,245

To record sales on credit.

4 Cost of Goods Sold ......................................................


5,000
Merchandise Inventory ..........................................

5,000

To record cost of sales.

9 Cash ....................................................................... 19,200


Factoring Fee Expense* .......................................
800
Accounts Receivable ......................................

20,000

To record sale of receivable. *($20,000 x .04)

17 Cash ....................................................................... 5,859


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

5,859

To record cash received on account.

27 Cash ....................................................................... 10,000


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

10,000

To record cash from a loan.


Note to Financial Statements
Accounts receivable in the amount of $12,500 are pledged
as security for a $10,000 note payable to Main Bank.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 7

425

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