E7-2

(Determine Cash Balance)

Presented below are a number of independent situations.
Instructions
For each individual situation, determine the amount that should be reported as cash.
1.Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to
subsidiary of $980,000; utility deposit paid to gas company $180.
$ 2,325,000
Cash balance of $925,000. Only the checking account balance should be reported as
cash. The certificates of deposit should be reported as a temporary investment, the
cash advance to subsidiary should be reported as accounts receivable, and the utility
deposit should be identified as a receivable from the gas company.
2.Checking account balance $600,000; an overdraft in special checking account at same
bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000;
petty cash fund $300; coins and currency on hand $1,350.
$ 601,650
Cash balance is $584,650 = $600,000 - $17,000 + $300 + $1,350
Note: The Cash held in a bond sinking fund is restricted. Bonds are usually a
noncurrent asset.
3.Checking account balance $590,000; postdated check from customer $11,000; cash
restricted due to maintaining compensating balance requirement of $100,000; certified
check from customer $9,800; postage stamps on hand $620.
$ 599,800
4. Checking account balance at bank $37,000; money market balance at mutual fund (has
checking privileges) $48,000; NSF check received from customer $800.
$ 85,000

5Checking account balance $700,000; cash restricted for future plant expansion
$500,000; short-term Treasury bills $180,000; cash advance received from customer $900
(not included in checking account balance); cash advance of $7,000 to company
executive, payable on demand; refundable deposit of $26,000 paid to federal government
to guarantee performance on construction contract.
$ 880,900

Cash balance is $700,900 = $700,000 + $900

Cash restricted for future plant expansion of $500,000 should be reported
as a noncurrent asset. Short-term treasury bills of $180,000 should be
reported as a temporary investment. Cash advance received from customer
of $900 should also be reported as a liability; cash advance of $7,000 to
company executive should be reported as a receivable; refundable deposit
of $26,000 paid to federal government should be reported as a receivable.
E7-7
(Recording Bad Debts)
Duncan Company reports the following financial information before adjustments.
Dr. Cr.
Accounts Receivable$100,000
Allowance for Doubtful Accounts$2,000
Sales (all on credit) 900,000
Sales Returns and Allowances 50,000
Instructions
Prepare the journal entry to record Bad Debt Expense assuming Duncan Company
estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.
DescriptionDebitCredit
(a)
Bad Debt Expense9,000
Allowance for Doutful Accounts9,000
Bad Debt Expense
$8,500
Allowance for Doubtful Accounts
$8,500
10%* ($900,000 $50,000) = $8,500
(b)
Bad Debt Expense
Allowance for Doubtful Accounts

$3,000
$3,000

E7-18
On July 1, 2007, Agincourt Inc. made two sales.
1. It sold land having a fair market value of $700,000 in exchange for a 4-year noninterest-bearing promissory note in the face amount of $1,101,460. The land is carried on
Agincourt's books at a cost of $590,000.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value
of $400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% 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 12% interest.
Instructions
Record the two journal entries that should be recorded by Agincourt Inc. for the sales
transactions above that took place on July 1, 2007. (For multiple debit/credit entries, list
in order of magnitude. Round answers to 2 decimal places. Hint: Use tables in text.)
Description
Debit
Note Receivable
1,101,460
Land
Discount on Note Receivable
Gain on Sale

Credit
590,000
401,460
110,000

Note Receivable1,987.07
Service Revenue
Discount on Note Receivable
7/1/04
Notes Receivable
Discount on Notes Receivable
Service Revenue

$400,000.00
$178,836.32
$221,163.68

To calculate the Discount on Notes Receivable:

PV of $400,000 due in 8 years at 12% = $400,000*0.40388
= $161,552
PV of $12,000 payable annually for 8 years at 12% = $12,000*4.96764
= $59,611.68
PV of the note and interest = $161,552 + $59,611.68 = $221,163.83
Discount = $400,000 - $221,163.68 = $178,836.32
E7-20
(Analysis of Receivables)
Presented below is information for Jones Company.
1. Beginning-of-the-year Accounts Receivable balance was $15,000.
2. Net sales (all on account) for the year were $100,000. Jones does not offer cash
discounts.
3. Collections on accounts receivable during the year were $70,000.

Instructions
(a) Prepare (summary) journal entries to record the items noted above.
DescriptionDebitCredit
Account Receivable100,000
Sales 100,000
Cash70,000
Account Receivable70,000
Accounts Receivable
Sales

$100,000

Cash
Accounts Receivable

$70,000

$100,000
$70,000

(b) Compute Jones' accounts receivable turnover ratio for the year. The company does not
believe it will have any bad debts. (Round answer to 2 decimal places.)
(4.44) times
Accounts Receivable Turnover = Sales / Average Receivables
Beginning Accounts Receivable = $15,000
Add: Sales
$100,000
Total Receivables
$115,000
Less: Cash Receipts
$70,000
Ending Accounts Receivable
$45,000
$100, 000
3.33
Accounts Receivable Turnover = $15, 000 $45, 000
2
(c) Use the turnover ratio computed in (b) to analyze Jones' liquidity. The turnover ratio
last year was 6.0. Has Jones' ratio increased or declined?
(Declined)
This could be a bad indication of future liquidity, if customers continue to pay
slowly. Jones may want to consider offering early payment (cash) discounts.
E7-24
(Bank Reconciliation and Adjusting Entries)
Angela Lansbury Company deposits all receipts and makes all payments by check. The
following information is available from the cash records.
June 30 Bank Reconciliation
Balance per bank$ 7,000

Add: Deposits in Transit 1,540

Deduct: Outstanding checks(2,000)
Balance per books$ 6,540
Month of July Results
Per BankPer Books
Balance July 31$8,650$9,250
July deposits 5,000 5,810
July checks4,000 3,100
July note collected (not included in July deposits)1,000July bank service charge15July NSF check from a customer, returned by the bank (recorded by bank as a
charge)335Instructions
(a) Prepare a bank reconciliation going from balance per bank and balance per book to
correct cash balance. (For multiple entries, list in order of magnitude. List all amounts as
positive amounts and subtract where necessary.)
Angela Lansbury Company
Bank Reconciliation
July 31
Balance per bank statement, July 31 $ 8,650
Add: Deposit Transit2,150
Deduct: Outstanding Check900
Correct cash balance, July 31$ 9,900
Balance per books, July 31$ 9,250
Add: Note Correction1,000
Less: Service Charge$ 15
NSF335
350
Corrected cash balance, July 31$ 9,900
Angela Lansbury Company
Bank Reconciliation
July 31
Balance per bank statement, July 31
Add: Deposits in transit
Less: Outstanding checks
Correct cash balance, July 31

$8,650
$2,350
($1,100)
$9,900

Balance per books, July 31

Add: Collection of note
Less: Bank service charge
Less: NSF check 335

$9,250
$1,000
$ 15
($350)

Corrected cash balance, July 31

$9,900

(b) Prepare the general journal entry or entries to correct the Cash account. (For multiple
debit/credit entries, list in order of magnitude.)
Cash
Office ExpensesBank Service Charge
Accounts Receivable
Notes Receivable

$650
$15
$335
$1,000