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Ch07-180204110130 Intermediate Accounting (California State University Long Beach)

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Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 7

Cash and Receivables

Donald E. Kieso Jerry J. Weygandt Terry D. Warfield

BRIEF EXERCISES 1

BE7-1 Kraft Enterprises owns the following assets at December 31, 2015. Cash in bank—savings account Cash on hand Tax refund due

€68,000 9,300 31,400

Checking account balance Postdated checks Certificates of deposit (180-day)

€17,000 750 90,000

What amount should be reported as cash? 4

BE7-2 Restin Co. uses the gross method to record sales made on credit. On June 1, 2015, it made sales of £50,000 with terms 3/15, n/45. On June 12, 2015, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.

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BE7-3 Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.

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BE7-4 Wilton, Inc. had net sales in 2015 of €1,400,000. At December 31, 2015, before adjusting entries, the balances in selected accounts were Accounts Receivable €250,000 debit, and Allowance for Doubtful Accounts €2,400 credit. If Wilton estimates that 2% of its net sales will prove to be uncollectible, prepare the December 31, 2015, journal entry to record bad debt expense.

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BE7-5 Use the information presented in BE7-4 for Wilton, Inc. (a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expense. (b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at €24,600. Prepare the entry to record bad debt expense.

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BE7-6 Milner Family Importers sold goods to Tung Decorators for $30,000 on November 1, 2015, accepting Tung’s $30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.

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BE7-7 Deng Acrobats lent NT$16,529 to Donaldson, Inc., accepting Donaldson’s 2-year, NT$20,000, zerointerest-bearing note. The implied interest rate is 10%. Prepare Deng’s journal entries for the initial transaction, recognition of interest each year, and the collection of NT$20,000 at maturity.

Exercises 335 5

BE7-8 Modest Mouse Company had the following information related to an account receivable from Counting Crows Inc. Initial face value, €22,000; payments received, €3,000; provision for uncollectibility, €5,000. Determine the amortized cost for the Counting Crows receivable.

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BE7-9 Jack Sparrow Corporation has elected to use the fair value option for one of its notes receivable. The note, accepted from a customer in exchange for trade accounts receivable, has a carrying value of $16,000. At year-end, Sparrow estimates the fair value of the note to be $17,500. (1) Determine the unrealized gain or loss on the note. (2) Prepare the entry to record any unrealized gain or loss.

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BE7-10 On October 1, 2015, Chung, Inc. assigns ¥1,000,000 of its accounts receivable to Seneca National Bank as collateral for a ¥750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

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BE7-11 Wood Incorporated factored €150,000 of accounts receivable with Engram Factors Inc., without guarantee of credit loss. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.

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BE7-12 Use the information in BE7-11 for Wood Incorporated. Assume that the receivables are sold with recourse (guarantee). Prepare the journal entry for Wood to record the sale.

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BE7-13 Arness Woodcrafters sells $250,000 of receivables to Commercial Factors, Inc. on a without guarantee basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Prepare the journal entry for Arness to record the sale.

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BE7-14 Use the information presented in BE7-13 for Arness Woodcrafters but assume that the receivables were sold with a full guarantee for credit losses. Prepare the journal entry and discuss the effects on Arness’s financial statements.

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BE7-15 Recent financial statements of adidas (DEU) report net sales of €10,799 million. Accounts receivable are €1,459 million at the beginning of the year and €1,624 million at the end of the year. Compute adidas’s accounts receivable turnover. Compute adidas’s average collection period for accounts receivable in days.

10 *BE7-16 Finman Company designated Jill Holland as petty cash custodian and established a petty cash

fund of £200. The fund is reimbursed when the cash in the fund is at £15. Petty cash receipts indicate funds were disbursed for office supplies £94 and miscellaneous expense £87. Prepare journal entries for the establishment of the fund and the reimbursement. 10 *BE7-17 Horton Corporation is preparing a bank reconciliation and has identified the following potential

reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books. (a) Deposit in transit $5,500. (b) Bank service charges $25. (c) Interest credited to Horton’s account $31.

(d) Outstanding checks $7,422. (e) NSF check returned $377.

10 *BE7-18 Use the information presented in BE7-17 for Horton Corporation. Prepare any entries necessary

tomake Horton’s accounting records correct and complete. 11 *BE7-19 Assume that Toni Braxton Company has recently fallen into financial difficulties. By reviewing all

available evidence on December 31, 2015, one of Toni Braxton’s creditors, the National Bank, determined that Toni Braxton would pay back only 65% of the principal at maturity. As a result, the bank decided that the loan was impaired. If the loss is estimated to be £225,000, what entry(ies) should National Bank make to record this loss?

EXERCISES 1

E 7-1 (Determine Cash Balance) The controller for Wallaby Co. is attempting to determine the amount of cash and cash equivalents to be reported on its December 31, 2015, statement of financial position. The following information is provided. 1. Commercial savings account of £600,000 and a commercial checking account balance of £800,000 are held at First National Bank of Olathe. 2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Wallaby to write checks on this balance, £5,000,000. 3. Travel advances of £180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

336 Chapter 7 Cash and Receivables 4. A separate cash fund in the amount of £1,500,000 is restricted for the retirement of long-term debt. 5. Petty cash fund of £1,000. 6. An I.O.U. from Marianne Koch, a company customer, in the amount of £150,000. 7. A bank overdraft of £110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 8. The company has two certificates of deposit, each totaling £500,000. These CDs have a maturity of 120 days. 9. Wallaby has received a check that is dated January 12, 2016, in the amount of £125,000. 10. Wallaby has agreed to maintain a cash balance of £500,000 at all times at First National Bank of Olathe to ensure future credit availability. 11. Wallaby has purchased £2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days. 12. Currency and coin on hand amounted to £7,700. Instructions (a) Compute the amount of cash (and cash equivalents) to be reported on Wallaby Co.’s statement offinancial position at December 31, 2015. (b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2015, statement of financial position. 1

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. If the item(s) is not reported as cash, explain the rationale. 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. Checking account balance $500,000; 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. 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. 4. Checking account balance at bank $42,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800. 5. Checking 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 the government to guarantee performance on construction contract.

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E7-3 (Financial Statement Presentation of Receivables) Pique Company shows a balance of €241,140 in the Accounts Receivable account on December 31, 2015. The balance consists of the following. Installment accounts due in 2016 Installment accounts due after 2016 Overpayments to creditors Due from regular customers, of which €40,000 represents accounts pledged as security for a bank loan Advances to employees Advance to subsidiary company (made in 2013)

€23,000 34,000 2,640 89,000 1,500 91,000

Instructions Illustrate how the information should be shown on the statement of financial position of Pique Company on December 31, 2015. 3

4

E7-4 (Determine Ending Accounts Receivable) Your accounts receivable clerk, Mary Herman, to whom you pay a salary of $1,500 per month, has just purchased a new Audi. You decided to test the accuracy of the accounts receivable balance of $117,000 as shown in the ledger. The following information is available for your first year in business. (1) Collections from customers (2) Merchandise purchased (3) Ending merchandise inventory (4) Goods are marked to sell at 40% above cost

$198,000 320,000 70,000

Exercises 337 Instructions Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account. 4

E7-5 (Recording Sales Gross and Net) On June 3, Bolton Company sold to Arquette Company merchandise having a sales price of £2,000 with terms of 2/10, n/60. An invoice totaling £90, terms n/30, was received by Arquette on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Arquette Company. Instructions (a) Prepare journal entries on the Bolton Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered at net of cash discounts. (b) Prepare the journal entry under basis (a)(2), assuming that Arquette Company did not remit payment until July 29.

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E7-6 (Recording Sales Transactions) Presented below is information from Lopez Computers Incorporated. July 1 10 17 30

Sold R$30,000 of computers to Smallwood Company with terms 3/15, n/60. Lopez uses the gross method to record cash discounts. Lopez received payment from Smallwood for the full amount owed from the July transactions. Sold R$250,000 in computers and peripherals to The Hernandez Store with terms of 2/10, n/30. The Hernandez Store paid Lopez for its purchase of July 17.

Instructions Prepare the necessary journal entries for Lopez Computers. 5

E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Dr. Accounts Receivable Allowance for Doubtful Accounts Sales Revenue (all on credit) Sales Returns and Allowances

Cr.

€160,000 € 2,000 800,000 50,000

Instructions Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a)1% of net sales and (b) 5% of accounts receivable. 5

E7-8 (Recording Bad Debts) At the end of 2015, Sorter Company has accounts receivable of £900,000 and an allowance for doubtful accounts of £40,000. On January 16, 2016, Sorter Company determined that its receivable from Ordonez Company of £8,000 will not be collected, and management authorized its write-off. Instructions (a) Prepare the journal entry for Sorter Company to write off the Ordonez receivable. (b) What is the cash realizable value of Sorter Company’s accounts receivable before the write-off of the Ordonez receivable? (c) What is the cash realizable value of Sorter Company’s accounts receivable after the write-off of the Ordonez receivable?

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E7-9 (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Estefan Inc. shows the following balances. Dr. Accounts Receivable Allowance for Doubtful Accounts Sales Revenue (net, all on credit)

Cr.

$80,000 1,750 $580,000

Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.

338 Chapter 7 Cash and Receivables 5

E7-10 (Bad-Debt Reporting) The chief accountant for Ballywood Corporation provides you with the following list of accounts receivable written off in the current year (amounts in thousands). Date

Customer

March 31 June 30 September 30 December 31

E. L. Masters Company Hocking Associates Amy Lowell’s Dress Shop R. Bronson, Inc.

Amount 7,800 9,700 7,000 9,830

Ballywood Corporation follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the tax authority will not accept other methods for recognizing bad debts. All of Ballywood Corporation’s sales are on a 30-day credit basis. Sales for the current year total 2,400,000, and research has determined that bad debt losses approximate 2% of sales. Instructions (a) Do you agree or disagree with Ballywood’s policy concerning recognition of bad debt expense? Why or why not? (b) By what amount would net income differ if bad debt expense was computed using the percentageof-sales approach? 5

E7-11 (Bad Debts—Aging) Puckett, Inc. includes the following account among its trade receivables. Alstott Co. 1/1 1/20 3/14 4/12 9/5 10/17 11/18 12/20

Balance forward Invoice #1710 Invoice #2116 Invoice #2412 Invoice #3614 Invoice #4912 Invoice #5681 Invoice #6347

700 1,100 1,350 1,710 490 860 2,000 800

1/28 4/2 4/10 4/30 9/20 10/31 12/1 12/29

Cash (#1710) Cash (#2116) Cash (1/1 Balance) Cash (#2412) Cash (#3614 and part of #2412) Cash (#4912) Cash (#5681) Cash (#6347)

1,100 1,350 255 1,000 890 860 1,250 800

Instructions Age the balance and specify any items that apparently require particular attention at year-end. 4

5 8

E7-12 (Journalizing Various Receivable Transactions) Presented below is information related to Sanford Corp. July

1 5

9

Dec. 29

31

Sanford Corp. sold to Legler Co. merchandise having a sales price of €10,000 with terms 2/10, net/60. Sanford records its sales and receivables net. Accounts receivable of €12,000 (gross) are factored with Rothchild Credit Corp. without guarantee at a financing charge of 9%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.) Specific accounts receivable of €9,000 (gross) are pledged to Rather Credit Corp. as security for a loan of €6,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.) Legler Co. notifies Sanford that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.) Sanford conducts an individual assessment of a note receivable with a carrying value of €350,000. Sanford determines the present value of the note is €275,000.

Instructions Prepare all necessary entries in general journal form for Sanford Corp. 8

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E7-13 (Fair Value Option) Kobiashi Company sells large store-rack systems and frequently accepts notes receivable from customers as payment. Kobiashi conducts a thorough credit check on its customers, and it charges a fairly low interest rate (½ of 1% payable monthly) on these notes. Kobiashi has elected to use the fair value option for one of these notes and has the following data related to the carrying and fair value for this note (amounts in thousands). December 31, 2015 December 31, 2016 December 31, 2017

Carrying Value

Fair Value

¥54,000 44,000 36,000

¥54,000 42,500 38,000

Exercises 339 Instructions (a) Prepare the journal entry at December 31 (Kobiashi’s year-end) for 2015, 2016, and 2017, to record the fair value option for these notes. (b) At what amount will the note be reported on Kobiashi’s 2016 statement of financial position? (c) What is the effect of recording the fair value option on this note on Kobiashi’s 2017 income? 8

E7-14 (Assigning Accounts Receivable) On April 1, 2015, Prince Company assigns $500,000 of its accounts receivable to the Hibernia Bank as collateral for a $300,000 loan due July 1, 2015. The assignment agreement calls for Prince Company to continue to collect the receivables. Hibernia Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Instructions (a) Prepare the April 1, 2015, journal entry for Prince Company. (b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2015, through June 30, 2015. (c) On July 1, 2015, Prince paid Hibernia all that was due from the loan it secured on April 1, 2015. Prepare the journal entry to record this payment.

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E7-15 (Journalizing Various Receivable Transactions) The trial balance before adjustment for Misumi Company shows the following balances (amounts in thousands). Dr. Accounts Receivable Allowance for Doubtful Accounts Sales Revenue

Cr.

¥82,000 1,750 ¥430,000

Instructions Using the data above, give the journal entries required to record each of the fo...