Lo chp 5 Solutions 18,19,23,26,28,32,34,37,43 PDF

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Download Lo chp 5 Solutions 18,19,23,26,28,32,34,37,43 PDF

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Chapter 5: P5-18, 19, 23, 26, 28, 32, 34, 37, 43

P5-18. Suggested solution:

Issue invoice August 5

Gross method Net method Dr. Accounts receivable 300k Dr.Accounts receivable 294k Cr. Sales revenue 300k Cr. Sales revenue 294k

Receive payment August 14

Dr. Cash 294k Dr. Cash 294k Dr. Cash discount [I/S] 6k Cr. Accounts receivable 300k Cr. Accounts receivable 294k

P5-19. Suggested solution:

Issue invoice Dec. 10 Receive payment Jan.20

Gross method Net method Dr. Accounts receivable 5,000 Dr. Accounts receivable 4,850 Cr. Sales revenue 5,000 Cr. Sales revenue 4,850 Dr. Cash

5,000

Dr. Cash 5,000 Cr. Interest/other revenue 150 Cr. Accounts receivable 5,000 Cr. Accounts receivable 4,850

P5-23. Suggested solution: ADA write-offs

39,850

26,000 5,000 130,000 121,150

Beginning balance Recoveries (opposite of write-offs) 4% × 3,250,000 Balance in ADA

Addition: Year end: Bad debt expense Allowance for doubtful accounts

130,000 130,000

P5-26. Suggested solution: a. The bad debts expense for 2020 is $6,300, as shown below in the T-account for ADA.

Days outstanding Balance in A/R, Dec. 31, 2020 % of A/R estimated to be uncollectible Estimated uncollectibles Dec. 31, 2020 Balance in A/R, Dec. 31, 2021 % of A/R estimated to be uncollectible Estimated uncollectibles Dec. 31, 2021 ADA 5,000 write-off 6,500 6,300 BDE 4,800 write-off 7,400 8,000 BDE 5,400 b.

c.

Current 30–60 61–90 Over 90 Total 400,000 150,000 40,000 10,000 0.5% 1% 2% 5% 2,000 1,500 800 500 4,800 440,000 0.5% 2,200

160,000 1% 1,600

30,000 2% 600

20,000 5% 1,000

5,400

Dec. 31, 2020 balance from calculations above

Dec. 31, 2021 balance from calculations above

The amount of receivables written off in 2021 is $7,400, as calculated in the ADA Taccount from part a. The journal entry for bad debts expense for 2020 is: Dr. Bad debts expense Cr. Allowance for doubtful accounts

P5-32. Suggested solution: Upon transfer Dr. Cash ($500,000 × 95%) of receivables Dr. Due from factor ($500,000 × 2% for holdback) Cr. Short-term debt—asset-backed financing Completion of collection

Dr. Cash Dr. Allowance for doubtful accounts ($500,000 – $496,000) Cr. Due from factor Dr. Short-term debt—asset-backed financing Dr. Interest expense Cr. Accounts receivable

6,300 6,300

475,000 10,000 485,000 6,000 4,000 10,000 485,000 15,000 500,000

P5-34. Suggested solution: a. The securitization transaction transfers the risks and rewards of ownership from Sparwood to the investors in the mortgage-backed securities because it is the investors who bear the cost of non-payment. Consequently, the transactions should be recorded as a sale. b. Dr. Cash Dr. Interest expense Cr. Mortgages receivable

19.5 m 0.5m 20m

P5-37. Suggested solution: a. To determine BDE, first determine the amount ADA using and aging schedule. Days outstanding from invoice date 0–30 days 31–90 days > 90 days Total Balance outstanding $7,100,000 $1,800,000 $375,000 $9,275,000 Estimated default rate 0.5% 2% 10% — Estimated bad debt $35,500 $36,000 $37,500 $109,000 The desired ending balance of ADA is thus $109,000. Combining this and other information relating to ADA, we can determine the amount of BDE. ADA 120,000 Write-off 70,000 3,000 = Recovery 56,000 = BDE 109,000 (from aging) b. Dr. Bad debts expense 56,000 Cr. Allowance for doubtful accounts

56,000

c. Dr. Allowance for doubtful accounts Cr. Accounts receivable

70,000 70,000

d. Dr. Cash Dr. Interest expense Cr. Accounts receivable

1,900,000 100,000

e. Dr. Cash 1,930,000 Dr. Due from factor (2% × $2,000,000) 40,000 Cr. Short-term debt—asset-backed financing

2,000,000

1,970,000

P5-43. Suggested solution: a.

To determine BDE, first determine the amount ADA using and aging schedule.

Days outstanding from invoice date Balance outstanding, Dec. 31, 2020 Estimated default rate Estimated allowance for doubtful accounts

0–30 days $320,000 1% $3,200

31–90 days $80,000 2% $1,600

> 90 days $30,000 4% $1,200

Total $430,000 — $6,000

The desired ending balance of ADA is thus $6,000. Combining this and other information relating to ADA, we can determine the amount of BDE. ADA 20,000 Write-off 75,000 8,000 = Recovery 53,000 = BDE 6,000 (from aging) Year end: Bad debt expense Allowance for doubtful accounts b.

53,000 63,000

The journal entry for the factoring without recourse is as follows. Dr. Cash 186,000 Dr. Interest expense 14,000 Cr. Accounts receivable

200,000

c. To record the journal entry for the sale, it is necessary to compute the value of the transactions. The only information available relates to the promissory note; there is not information on the fair value of the sale. The present value of the note is computed as follows: BAII PLUS financial calculator: 3 N, 10 I/Y, 10,500 (150,000 x .07) PMT, 150,000 FV, CPT PV = –138,809 (rounded) Then the journal entry for the sales made in exchange for the promissory note is as follows: Dr. Note receivable 138,809 Cr. Sales revenue 138,809 d. Since the company made the sale and received the promissory note at the beginning of the year, the amount of interest is for the full year, so it is $138,809 × 10% x 12/12 = $13,881. Year end: Cash (assume payment date Dec 31) 10,500 Note Receivable (to balance) 3,381 Interest revenue 13,881...