ANSWERS TO QUESTIONS - CHAPTER 7
1. Accounts receivable are the expected future receipts when a company permits one of its customers to buy now and pay later. The amounts are usually small with a short term to maturity. Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms.
2. The net realizable value is the amount expected to be collected from accounts receivable. It is the face amount of receivables less an allowance for uncollectible accounts.
3. The going concern assumption is based upon the premise that since companies believe that they will continue to operate, they assume that they will be responsible for paying the full balance of their obligations. Accordingly, receivables are carried at net realizable value and payables at full value on the balance sheet.
4. The allowance method is a method of accounting for bad debts where bad debts are estimated and expensed in the same period in which the corresponding sales are recognized. The receivables are reported at net realizable value in the financial statements. The direct write-off method is the practice of recognizing bad debt expense only when accounts are determined to be uncollectible.
5. The most common format for reporting accounts receivable on the balance sheet is gross receivables less the allowance for doubtful accounts. This format allows the users to see both the total amount owed by the customers and the amount the company expects to collect.
6. Estimating bad debts expense improves the accuracy of financial statements by (1) reporting expected realizable value of receivables (i.e., future cash flows) and (2) presenting a better matching of expenses with related revenues. This provides a better measure of managerial performance.
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7. The practice of reestablishing a previously written off account, then recording its collection as a payment on account, reflects a complete record of account activity. Such a record provides an accurate picture of the source of cash flows and improves the customer’s credit history.
8. Factors for use in estimating bad debts include:(1) the percentage of uncollectible accounts from years' past.(2) adjustment for new circumstances that are anticipated to be experienced in the future.(3) industry averages or experiences of similar businesses.(4) examination of current accounts and company credit
policies.
9. Recognizing bad debts expense reduces accounts receivable on the asset side and reduces the retained earnings on the equity side.
10. A write-off of an uncollectible account when the allowance method is used has no effect on the accounting equation because the allowance account, a contra asset account, is reduced and the accounts receivable account, also on the asset side, is reduced.
When the direct method is used, a write-off of an uncollectible account reduces assets (accounts receivable) and reduces retained earnings (increases bad debts expense).
11. The recovery of a bad debt when the allowance method is used does not affect the income statement. Only accounts receivable, cash, and allowance for doubtful accounts are affected. Cash flow from operations increases as a result of the collection.
12. The advantage of using the allowance method is that it improves the accuracy of the financial statements; the advantage of using the direct write-off method is that it is convenient to use.
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13. The direct write-off method is not GAAP, but is allowed if the amount of uncollectible accounts is immaterial (i.e., insignificant).
14. It is generally beneficial to accept major credit cards because the business then avoids the risk of bad debts as well as the cost of maintaining credit records. It may also attract more customers.
15. The acceptance of major credit cards enables a business to avoid the cost of uncollectible accounts and the clerical costs of maintaining accounts receivable records. In addition, the business avoids the implicit cost of lost opportunities due to delayed cash flows.
16. Warranty - a promise to correct a deficiency or dissatisfaction in quality, quantity, or performance.
17. The recognition of warranty expense reduces the amount of retained earnings shown on the balance sheet and reduces net income on the income statement. It also increases the amount of liabilities on the balance sheet.
18. Warranty cost is shown on the statement of cash flows when the actual cost is incurred (i.e., paid).
19. At maturity, the amount due on an interest-bearing note is the face amount plus accrued interest. Discount notes have the interest included in the face value of the note.
20. The carrying value of a discount note is computed by subtracting the amount of unamortized interest held in the discount on notes payable account from the face value amount shown in the notes payable account.
21. The effective rate of interest is higher on the discounted note because the actual amount of interest paid is more than the amount of the discount rate applied to the amount of cash received at issue. The amount received when making discount notes is less than that of interest-bearing notes because the interest portion is subtracted.
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Discounted Interest Bearing
Face Value $10,000$10,000Less: Discount ($10,000 x .12) (1,200) -0- Proceeds $ 8,800 $10,000
Effective Interest Rate:Discounted Note: $1,200 $8,800 = 13.6%Interest-Bearing Note: $1,200 $10,000 = 12.0%
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22. Amortization of discount reduces net income on the income statement, increases the carrying value of notes payable on the balance sheet, and does not affect the statement of cash flows.
23. Event Effect on Accounting Equation
Issuing Discount Note Increase in Cash (asset); Increase in Notes Payable (liability); Increase in Discount on Notes Payable (contra liability)
Amortization of Discount Decrease in Discount on Notes Payable (contra liability); Decrease in Retained Earnings (equity)
Payment of Note at MaturityDecrease in Cash (asset); Decrease in Notes Payable (liability)
24. Discount on Notes Payable is a contra-liability account that is subtracted from the face value of the note to determine the carrying value of the liability.
25. AccountsReceivable = Sales Turnover Accounts Receivable
The A/R turnover tells how many times during the year on average accounts receivable is collected (i.e., converted to cash).
26. Average Daysto Collect = 365 Accounts Receivable Accounts Receivable Turnover
This ratio tells the user how many days it takes a company to collect its accounts receivable.
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27. No, accounting terminology is not even standard in English-speaking countries. In the U.K. sales is called “turnover,” inventory is “stocks,” and the “gearing ratio” refers to the debt-to-assets ratio. Knowing this terminology is important for companies involved in international trade.
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SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 7
EXERCISE 7-1Aa. and c.
Stateline Auto ServiceT-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Retained Earnings2004 20042. 18,000 cl 19,800Bal.
18,000 Bal.
19,800
20053. 19,000 Service RevenueBal.
37,000 2004
cl 20,000
1. 20,000
Accounts Receivable Bal.
-0-
2004 20051. 20,000 2. 18,000 2. 22,000Bal.
2,000 Bal.
22,000
20052. 22,000 1. 160 Bad Debts Expense
3. 19,000 2004
Bal.
4,840 3. 200 cl 200
Bal.
-0-
Allow. For Bad Debts 2005
2004 4. 220 3. 200 Bal
.220
Bal.
200
20051. 160 4. 220
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Bal.
260
Note: Closing entries for 2005 were not made because they were not necessary to answer the questions.
7-8
EXERCISE 7-1 (cont.)
b. (1) Net Income for 2004: $19,800 ($20,000 $200)(2) Net Cash Flow from Operating Activities:$18,000(3) Balance of Accounts Receivable, 12/31/2004: $2,000(4) Net Realizable Value of Accounts Receivable,
12/31/2004: $1,800 ($2,000 $200)
c. (1) Net Income for 2005: $21,780 ($22,000 $220)(2) Net Cash Flow from Operating Activities:$19,000(3) Balance of Accounts Receivable, 12/31/2004:
$4,840(4) Net Realizable Value of Accounts Receivable,
12/31/2004: $4,580 ($4,840 $260)
7-9
EXERCISE 7-2A
Event
Assets
=Liab.
+ S. Equity
Rev.
– Exp.
= Net Inc.
Cash Flow
1. + NA + + NA + NA2. +/ NA NA NA NA NA + OA3. NA NA + NA4. +/ NA NA NA NA NA NA
7-10
EXERCISE 7-3A
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance $ 2,000
Plus: Revenue on Account 9,000Less: Write-off (110)Less: Ending Balance (2,200
)Collections of Accounts Rec.
$ 8,690
b. Analyze the Allowance for Doubtful Accounts account:
Allowance for Doubtful Accounts
Beginning Balance $100Less: Write-off (110)Less: Ending Balance (170)Bad Debts Expense $180
Note to Instructor: This information can also be shown in T-Account format.
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EXERCISE 7-4A
Selected T-Accounts:
Cash Allowance for Doubt Acct.
Sales Revenue
2007 12/31/06 20072. 920 Bal. 3,200 3.
204,0004.197,000 2007
1. 3,400 2. 920Accounts Receivable 5. 4,080 Bad Debts Expense
12/31/06 Bal. 4,800 2007Bal.
97,0005. 4,080
20072. 920 1. 3,4003.204,000 2. 920
4.197,000
Bal.100,600
2007 transactions:1. Bad accounts written off: $3,4002. Collected previously written off accounts: 9203. Sales on account: 204,0004. Collections of accounts receivable: 197,0005. Bad Debts Expense (204,000 x 2%):
4,080
a. 1. Allowance for Doubtful Accounts, 12/31/07:$ 4,8002. Accounts Receivable, 12/31/07: 100,6003. Net Realizable Value ($100,600 – $4,800): 95,800
b. Bad Debts Expense 2007 ($204,000 x 2%): $4,080
c. The recovery of previously written off accounts will cause two asset exchange transactions. First, reinstate the accounts receivable; + Accounts Receivable, +Allowance
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for Doubtful Accounts. Second, record the collection of the accounts receivable; +Cash, – Accounts Receivable.
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EXERCISE 7-5A
Accounts Receivable Allowance for Doubt. Accts.Cr. Sales 352,000 Coll. 320,000 Chg. Off 320 Est. 3,520
Chg. Off 320 Bal. 3,200
Bal. 31,680
a. 1. $31,680 (see above)
2. $3,200
3. $3,520 ($352,000 x 1%)
4. $31,680 $3,200 = $28,480
b.1. $31,680 (same as above)
2. $320 (the amount charged off)
3. $31,680 (the balance of accounts receivable)
7-14
EXERCISE 7-6Aa.
Ben’s Repair ShopHorizontal Statements Model
Balance Sheet Income Statement Statement ofEvent
Assets = Liab.
+ S. Equity
Rev. – Exp. = Net Inc.
Cash Flows
Cash + Acct. Rec.
= + Ret. Ear.
20061. 12,000 + NA = NA + 12,000 12,00
0 NA = 12,000 12,000 OA
2. NA + 1,500 = NA + 1,500 1,500 NA = 1,500 NA3. (8,200) + NA = NA + (8,200) NA 8,200 = (8,200) (8,200) OABal. 3,800 + 1,500 = NA + 5,300 13,50
0 8,200 = 5,300 3,800 NC
20074. NA + (50) = NA + (50) NA 50 = (50) NABal. 3,800 + 1,450 = NA + 5,250 -0- 50 = (50) NA
b. Net Income for 2006: $5,300
7-15
EXERCISE 7-6A (cont.)c.
Ben’s Repair ShopGeneral Journal
Date Account Titles Debit Credit
20061. Cash 12,000
Sales Revenue 12,000
2. Accounts Receivable 1,500Sales Revenue 1,500
3. Operating Expenses 8,200Cash 8,200
20074. Bad Debts Expense 50
Accounts Receivable 50
7-16
EXERCISE 7-7Aa.
Big Elk Hunting LodgeHorizontal Statements Model
Balance Sheet Income Statement Statement of
Assets = Liab.
+ S. Equity
Rev. Exp. = Net Inc.
Cash Flows
Event
Cash + Acc. Rec. = + Ret. Ear
1. + 76,800 = NA + 76,800 80,000 3,200
= 76,800 NA
2. 76,800
+ ( 76,800) = NA + NA NA NA = NA 76,800 OA
b. 1. Total assets: Cash $ 76,800
2. Revenue recognized: $ 80,000
3. Cash Flow from Operating Activities:$ 76,800
4. By accepting credit cards rather than allowing customers to purchase goods on account, Big Elk Hunting Lodge avoids the risk of bad debts as well as the expense of maintaining and collecting accounts receivable.
7-17
EXERCISE 7-8A
a. & b.Event
Account Title Debit Credit
a. Accounts Receivable 3,346.50Credit Card Expense ($3,450 x 3%)
103.50
Sales Revenue 3,450.00
b. Cash 3,346.50Accounts Receivable 3,346.50
c. Net Income Sales $3,450.00Credit Card Expense (103 .50) Net Income $3,346 .50
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EXERCISE 7-9ANote: T-Accounts are provided for the use of the instructor.
Assets = Liabilities + Stockholders’ Equity
Cash Warranties Payable
Sales Revenue
Sales110,000
Pur.75,000
Pd. 320 Est. 5,500 Sales 110,000
Pd. 320 Bal. 5,180Bal.34,680
Cost of Goods Sold
Sold75,000
Mdse. InventoryPur.75,000
Sold75,000
Warranty Expense
Bal. -0- Est. 5,500
Taylor’s ComputersFinancial Statements
Income Statement
Sales Revenue $110,000
Cost of Goods Sold (75,000)
Gross Margin 35,000
Warranty Expense (5,500)
Net Income $ 29,500
Statement of Cash Flows
Cash Flows From Operating Activities:Inflow from Customers $110,00
0Outflow for Inventory (75,000)Outflow for Warranty Expense (320)
Net Cash Flow from Operating Activities $34,680
Cash Flows From Investing Activities -0-
Cash Flows From Financing Activities -0-
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Net Change in Cash 34,680Plus: Beginning Cash Balance -0-Ending Cash Balance $34,680
7-20
EXERCISE 7-9A (cont.)
The difference between net income and cash flows from operating activities is the difference in the amount of warranty expense accrued and the amount actually paid. The estimated warranty expense based on a percent of sales amounted to $5,500, but only $320 of that amount was actually paid.
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EXERCISE 7-10Aa.
Event
Assets
= Liab.
+ S. Equity
Rev.
Exp.
= Net Inc.
Cash Flow
Est. NA = + + NA + = NAPd. = + NA NA NA = NA OA
Event Account Titles Debit Credit
b.Est. Warranty Expense 900
Warranties Payable 900
c.Payment
Warranties Payable 315
Cash 315
d. Companies can match the warranty expense with the revenue that will produce the repairs. This concept follows the matching principle.
7-22
EXERCISE 7-11A
Cash Notes Payable Service Revenue1. 44,0001 1. 50,000 2.
36,8002.36,800 Bal.
50,000Bal.36,800
Bal.80,800
Disc. on Notes Pay. Interest Expense1. 6,000 3. 5,000 3. 5,0002
Bal. 1,000 Bal.5,000
1$50,000 x 12% = $6,000; $50,000 $6,000 = $44,0002$6,000 x 10/12 = $5,000
a. Total Liabilities:Notes Payable $50,000Less: Discount on Notes Payable
(1,000)
Total Liabilities $ 49,000
b. Income Reported on the Income Statement:Service Revenue $36,800Less: Interest Expense (5,000)Net Income $31,800
c. Cash Flows From Operating Activities:Inflow from Customers $36,800
7-23
EXERCISE 7-11A (cont.)d.
Barnes General Journal
Date Account Titles Debit Credit
3/1/06 Cash 44,000Discount on Notes Payable 6,000
Notes Payable 50,000
12/31/06
Interest Expense 5,000
Discount on Notes Payable 5,000
2/28/07 Interest Expense 1,000Discount on Notes Payable 1,000
2/28/07 Notes Payable 50,000Cash 50,000
7-24
EXERCISE 7-12Aa.
Balance Sheet Income Statement Statement of
Event
Assets
= Liabilities + S. Equity
Rev. Exp. = Net Inc.
Cash Flows
Cash = Notes Pay. Disc. on NP
+ Ret. Ear.
1. 17,600
= 20,000 2,400 + NA NA NA = NA 17,600 FA
Balance Sheet Income Statement Statement of
Event
Assets
= Liabilities + S. Equity
Rev. Exp. = Net Inc.
Cash Flows
Cash = Notes Pay. + Int. Pay. + Ret. Ear.
2. 20,000
= 20,000 + NA + NA NA NA = NA 20,000 FA
b. Discount Note: 20,000 x 12% = $2,400Interest-beraing Note: 20,000 x 12% = $2,400
c. Discount Note: Principal $17,600Interest-bearing Note: Principal $20,000
d. Effective Interest Rate = Interest Paid Principal Amount
Discount Note: $2,400 $17,600 = 13.64%
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Interest-bearing Note: $2,400 $20,000 = 12%
The effective interest rate is higher for the discount note. Both notes paid the same amount of interest, but only $17,600 of cash was received from the loan for the discount note.
7-26
EXERCISE 7-13A
Ray CoGeneral Journal
Date Account Titles Debit Credit
a.6/1/06 Cash 27,000
Discount on Notes Payable 3,000Notes Payable 30,000
b.12/31/06
Interest Expense* 1,750
Discount on Notes Payable 1,750
c.5/31/07 Interest Expense** 1,250
Discount on Notes Payable 1,250
5/31/07 Notes Payable 30,000Cash 30,000
*$3,000 x 7/12 = $1,750**$3,000 x 5/12 = $1,250
7-27
EXERCISE 7-14A a.A-1 Steel Co. T-Accounts, 2007
Assets = Liabilities + Stockholders’ Equity
Cash Accounts Payable Common StockBal. 3,000 Bal.
7,500Bal.12,000
1. 5,000 7. 1,100 10. 52,000 2. 47,000 1. 5,0006. 7,280 8. 9,600 Bal. 2,500 Bal.
17,0009. 75,000 10.
52,00011. 2,000 Warranties Payable Retained Earnings
Bal.25,580
7. 1,100 4. 3,280 Bal.18,700
Bal. 2,180Dividends
Accounts Receivable 11. 2,000Bal.
15,000Notes Payable Bal. 2,000
3a. 82,000
5. 600 6. 8,000
9. 75,000 Bal. 8,000
Sales Revenue
Bal. 21,400
3a. 82,000
Discount on Notes Pay.
Bal. 82,000
Allow. for Doubt. Acct.
6. 720 13. 240
Bal. 800 Bal. 480 Cost of Goods Sold5. 600 3b. 46,000
12. 820 Bal.46,000Bal. 1,020
Warranty ExpenseMerchandise
Inventory4. 3,280
Bal.21,000
Bal. 3,280
2. 47,000 3b.46,000
Bal.22,000
Salaries Expense
8. 9,600
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Bal. 9,600
Bad Debts Expense12. 820Bal. 820
Interest Expense13. 240Bal. 240
4: $82,000 x 4% = $3,280 6: $8,000 x 9% = $72012: $82,000 x 1% = $82013: $720 x 4/12 = $240EXERCISE 7-14A (cont.)
b.A-1 Steel Company
Financial StatementsFor the Year Ended December 31, 2007
Income Statement
Sales Revenue $ 82,000
Cost of Goods Sold (46,000)
Gross Margin 36,000
Operating ExpensesSalaries Expense $ 9,600Warranty Expense 3,280Bad Debts Expense 820
Total Operating Expenses (13,700)
Operating Income 22,300Interest Expense (240)
Net Income $22,060
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$12,000
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Plus: Stock Issued 5,000Ending Common Stock $17,000
Beginning Retained Earnings
18,700
Plus: Net Income 22,060Less: Dividends (2,000)Ending Retained Earnings 38,760
Total Stockholders’ Equity $55,760
7-30
EXERCISE 7-14A b. (cont.)
A-1 Steel CompanyBalance Sheet
As of December 31, 2007
AssetsCash $
25,580Accounts Receivable $21,400Less: Allowance for Doubtful
Accounts(1,020) 20,380
Merchandise Inventory 22,000Total Assets $ 67,960
LiabilitiesAccounts Payable $ 2,500Warranties Payable 2,180Notes Payable $ 8,000Less: Discount on Notes Payable (480) 7,520
Total Liabilities 12,200
Stockholders’ EquityCommon Stock 17,000Retained Earnings 38,760
Total Stockholders’ Equity 55,760
Total Liabilities and Stockholders’ Equity
$ 67,960
7-31
EXERCISE 7-14A b. (cont.)
A-1 Steel CompanyStatement of Cash Flows
For the Year Ended December 31, 2007
Cash Flows From Operating Activities:
Inflow from Customers $ 75,000Outflow for Inventory (52,000)Outflow for Expenses (10,700)
Net Cash Flow from Operating Activities
$12,300
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Stock Issue 5,000Outflow for Dividend (2,000)Inflow from Loan 7,280
Net Cash Flow from Financing Activities
10,280
Net Change in Cash 22,580Plus: Beginning Cash Balance 3,000Ending Cash Balance $25,58
0
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SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 7
PROBLEM 7-15Aa.
Event Number
Type of Transaction
20061. Asset Source2. Asset Exchange3. Asset Use
20071. Asset Source2. Asset Exchange3. Asset Exchange4a. Asset Exchange4b. Asset Exchange5. Asset Use6. Asset Use
b. 2006 and 2007Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Equity
Rev. Exp. =Net Inc. Cash Flows
2006 1. + NA + + NA + NA 2. + NA NA NA NA NA + OA 3. NA NA + NA
2007 1. + NA + + NA + NA 2. + NA NA NA NA NA + OA 3. + NA NA NA NA NA NA 4a.* + NA NA NA NA NA NA 4b. + NA NA NA NA NA + OA 5. NA NA + OA 6. NA NA + NA
*4a. is reinstatement of the previously charged off receivable; 4b is the collection of the account.
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PROBLEM 7-15A (cont.)
c.
Durm’s Consulting
Date Account Titles Debit Credit
20061. Accounts Receivable 40,000
Service Revenue 40,000
2. Cash 34,000Accounts Receivable 34,000
3. Bad Debts Expense* 800Allowance for Doubtful
Accounts800
*$40,000 x 2% = $800
Durm’s Consulting T-Accounts 2006
Assets = Stockholders’ Equity
Cash Accounts Receivable
Service Revenue
2. 34,000 1. 40,000 2.34,000
1. 40,000
Bal. 34,000
Bal. 6,000
Bal. 40,000
Allow. For Doubtful Accounts
Bad Debts Expense
3. 800 3. 800Bal. 800 Bal. 800
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7-35
PROBLEM 7-15A (cont.)d.
Durm’s ConsultingFinancial Statements
For the Year Ended 2006
Income Statement
Service Revenue $40,000
Bad Debts Expense (800)
Net Income $39,200
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued -0-Ending Common Stock $ -0-
Beginning Retained Earnings
-0-
Plus: Net Income 39,200Ending Retained Earnings
39,200
Total Stockholders’ Equity
$39,200
7-36
PROBLEM 7-15A d. (cont.)
Durm’s ConsultingFinancial Statements
Balance Sheet As of December 31, 2006
AssetsCash $34,000Accounts Receivable $ 6,000Less: Allowance for Doubtful
Accounts(800) 5,200
Total Assets $39,200
Liabilities $ -0-
Stockholders’ EquityCommon Stock $ -0-Retained Earnings 39,200
Total Stockholders’ Equity 39,200
Total Liabilities and Stockholders’ Equity
$39,200
Statement of Cash FlowsFor the Year Ended 2006
Cash Flows From Operating Activities:
Inflow from Customers $34,000Net Cash Flow from Operating Activities
$34,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash 34,000
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Plus: Beginning Cash Balance -0-Ending Cash Balance $34,000
7-38
PROBLEM 7-15A e. (cont.)
Durm’s Consulting
Date Account Titles Debit Credit
2006 Closing Entries1. Service Revenue 40,000
Retained Earnings 40,000
2. Retained Earnings 800Bad Debts Expense 800
Durm’s ConsultingT-Accounts 2006 Closing Entries
Assets = Stockholders’ Equity
Cash Accounts Receivable
Retained Earnings
Bal.34,000
Bal. 6,000 2. 800 1. 40,000
Bal39,200
Allowance for Doubtful Accounts Service Revenue
Bal. 800 1.40,000
Bal.40,000Bal. -0-
Bad Debts Expense
Bal. 800 2. 800Bal. -0-
Durm’s ConsultingAfter Closing Trial Balance
December 31, 2006
Account Title Debit Credit
Cash $34,000Accounts Receivable 6,000
7-39
Allowance for Doubtful Accounts
$ 800
Retained Earnings 39,200
Totals $40,000 $40,000
PROBLEM 7-15A (cont.)
c. (2007)
Durm’s Consulting
Date Account Titles Debit Credit
20071. Accounts Receivable 51,500
Service Revenue 51,500
2. Cash 47,500Accounts Receivable 47,500
3. Allowance for Doubtful Accounts
150
Accounts Receivable 150
4a. Accounts Receivable 12Allowance for Doubtful
Accounts12
4b. Cash 12Accounts Receivable 12
5. Operating Expenses 36,500Cash 36,500
6. Bad Debts Expense* 515Allowance for Doubtful
Accounts515
*$51,500 x 1% = $515
7-40
PROBLEM 7-15A c. (cont.)
2007Durm’s ConsultingT-Accounts 2007
Assets = Stockholders’ Equity
Cash Accounts Receivable
Retained Earnings
Bal.34,000
Bal. 6,000
Bal.39,200
2. 47,500 5.36,500
1. 51,500 2.47,500
4b. 12 4a. 12 3. 150 Service RevenueBal.45,012
4b. 12 1. 51,500
Bal. 9,850 Bal. 51,500
Allow. For Doubtful Accounts
Bad Debts Expense
Bal. 800 6. 5153. 150 4a. 12 Bal. 515
6. 515Bal.
1,177Operating Expenses
5. 36,500Bal.
36,500
7-41
PROBLEM 7-15A
d. (2007)Durm’s Consulting
Financial StatementsFor the Year Ended 2007
Income Statement
Service Revenue $51,500
ExpensesOperating Expenses $36,500Bad Debts Expense 515
Total Expenses (37,015)
Net Income $14,485
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued -0-Ending Common Stock $ -0-
Beginning Retained Earnings
39,200
Plus: Net Income 14,485Ending Retained Earnings
53,685
Total Stockholders’ Equity
$53,685
7-42
PROBLEM 7-15A d. (cont.)2007
Durm’s ConsultingFinancial Statements
Balance Sheet As December 31, 2007
AssetsCash $45,012Accounts Receivable $ 9,850Less, Allowance for Doubtful
Accounts(1,177) 8,673
Total Assets $53,685
Liabilities $ -0-
Stockholders’ EquityCommon Stock $ -0-Retained Earnings 53,685
Total Stockholders’ Equity 53,685
Total Liabilities and Stockholders’ Equity
$53,685
Statement of Cash FlowsFor the Year Ended 2007
Cash Flows From Operating Activities:
Inflow from Customers $47,512Outflow for Expenses (36,500)
Net Cash Flow from Operating Activities
$11,012
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash 11,012
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Plus: Beginning Cash Balance 34,000Ending Cash Balance $45,012
7-44
PROBLEM 7-15A (cont.) e. (2007)
Durm’s Consulting
Date Account Titles Debit Credit
2007 Closing Entries1. Service Revenue 51,500
Retained Earnings 51,500
2. Retained Earnings 37,015Operating Expenses 36,500Bad Debts Expense 515
Durm’s Consulting T-Accounts 2007 Closing Entries
Assets = Stockholders’ Equity
Cash Accounts Receivable Retained EarningsBal.45,012 Bal. 9,850 Bal. 39,200
2. 37,015 1. 51,500Bal. 53,685
Allow. For Doubtful Accounts Service Revenue
Bal.1,177 1. 51,500 Bal. 51,500Bal. -0-
Bad Debts ExpenseBal. 515 2. 515Bal. -0-
Operating ExpensesBal.36,500 2. 36,500Bal. -0-
7-45
PROBLEM 7-15A e. (cont.)2007
Durm’s ConsultingAfter Closing Trial Balance
December 31, 2007
Account Title Debit Credit
Cash $ 45,012Accounts Receivable 9,850Allowance for Doubtful Accounts
$ 1,177
Retained Earnings 53,685
Totals $ 54,862 $ 54,862
7-46
PROBLEM 7-16A
Accounts Receivable Allowance for Doubtful Accounts
1/1 172,800
Col 1,284,860
Bad A/C 4,500
1/1 5,184
Sales 1,269,800
Bad A/C 4,500 Est. 6,349
Bal. 153,240 Bal. 7,033
a. 1. $1,269,800 x .5% = $6,349
2. Accounts Receivable Balance, 12/31/07 $153,240Less: Allowance for Doubtful Accounts,
12/31/07 (7,033 )
Net Realizable Value $146,207
b.Hill Cabinet CompanyGeneral Journal, 2007
Event
Account Title Debit Credit
1a. Accounts Receivable 1,269,800Sales Revenue 1,269,800
1b. Cost of Goods Sold 800,000Inventory 800,000
2. Cash 1,284,860Accounts Receivable 1,284,860
3. Allowance for Doubtful Accounts
4,500
Accounts Receivable 4,500
4. Bad Debts Expense 6,349Allowance for Doubtful
Accounts6,349
7-47
c. Bad debts expense is an estimate of current receivables that may eventually be uncollectible. The amount written off as uncollectible is the actual amount that was determined in the current accounting period to be uncollectible.
7-48
PROBLEM 7-17Aa.
Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Equity
Rev. Exp. =Net Inc. Cash Flows
2004 1. + NA + NA NA NA + FA 2. + NA NA NA NA NA OA 3a. + NA + + NA + + OA 3b. + NA + + + + NA 3c. + NA + + NA + NA 3d. NA NA + NA 4. + NA NA NA NA NA + OA 5. + NA NA NA NA NA + OA 6. NA NA + NA 7. NA + NA + NA 8. NA NA + OA
Legend:3a. Cash Sales3b.Credit Card Sales (remember that credit card expense is recorded).3c. Sales on Account3d.Cost of Sales
7-49
PROBLEM 7-17A (cont.)
b.Brigg’s Supply Co.
General Journal, 2004
Date
Account Titles Debit Credit
1. Cash 70,000Common Stock 70,000
2. Merchandise Inventory 240,000Cash 240,000
3a. Cash 100,000Sales Revenue 100,000
3b. Accounts Receivable - Credit Card Co.
242,500
Credit Card Expense 7,500Sales Revenue 250,000
3c. Accounts Receivable 20,000Sales Revenue 20,000
3d. Cost of Goods Sold 190,000Merchandise Inventory 190,000
4. Cash 242,500Accounts Receivable - Credit
Card Co.242,500
5. Cash 16,000Accounts Receivable 16,000
6. Bad Debts Expense 240Accounts Receivable 240
7. Warranty Expense 650Warranties Payable 650
8. Selling and Administrative Exp. 53,000
7-50
Cash 53,000
PROBLEM 7-17A b. (cont.)
Brigg’s Supply Co. T-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Warranties Payable Common Stock1. 70,000 2.
240,0007. 650 1. 70,000
3a.100,000
8. 53,000 Bal. 650 Bal. 70,000
4. 242,5005. 16,000 Sales RevenueBal.
135,5003a.
100,0003b.
250,000Accounts Receivable 3c. 20,000
3b.242,500 4.242,500
Bal.370,000
3c. 20,000 5. 16,0006. 240 Cost of Goods Sold
Bal. 3,760 3d.190,000
Bal.190,000
Merchandise Inventory
2. 240,000 3d.190,000
Bad Debts Expense
Bal.50,000 6. 240Bal. 240
Credit Card Expense3b. 7,500Bal. 7,500
Warranty Expense7. 650Bal. 650
Selling & Adm.
7-51
Expense8. 53,000Bal. 53,000
7-52
PROBLEM 7-17A (cont.)
c.Brigg’s Supply Co.
Financial StatementsFor the Year Ended 2004
Income Statement
Sales Revenue $370,000
Cost of Goods Sold (190,000)
Gross Margin 180,000
Operating ExpensesBad Debts Expense $ 240Credit Card Expense 7,500Warranty Expense 650Selling & Adm. Expense 53,000
Total Operating Expenses
(61,390)
Net Income $118,610
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued 70,000Ending Common Stock $ 70,000
Beginning Retained Earnings
-0-
Plus: Net Income 118,610Ending Retained Earnings
118,610
Total Stockholders’ Equity
$188,610
7-53
PROBLEM 7-17A c. (cont.)
Brigg’s Supply Co.Balance Sheet
As of the End of the Year 2004
AssetsCash $135,500Accounts Receivable 3,760Merchandise Inventory 50,000
Total Assets $189,260
LiabilitiesWarranties Payable $ 650
Stockholders’ EquityCommon Stock $ 70,000Retained Earnings 118,610
Total Stockholders’ Equity 188,610
Total Liabilities and Stockholders’ Equity
$189,260
7-54
PROBLEM 7-17A c. (cont.)
Brigg’s Supply Co.Statement of Cash FlowsFor the Year Ended 2004
Cash Flows From Operating Activities:
Inflow from Customers $358,500Outflow for Inventory (240,000
)Outflow for Expenses (53,000)
Net Cash Flow from Operating Activities
$ 65,500
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Inflow from Stock Issued 70,000Net Cash Flow from Financing Activities
70,000
Net Change in Cash 135,500Plus: Beginning Cash Balance -0-Ending Cash Balance $135,50
0
7-55
PROBLEM 7-18A
a.City Corp.
Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Equity
Rev. Exp. =Net Inc. Cash Flows
2001 1. + + NA NA NA NA + FA 2. NA NA + OA 3. + NA + + NA + + OA 4. NA + NA + NA
2002 1. + NA + + NA + + OA 2. NA NA + OA 3a. NA + NA + NA 3b. NA NA NA NA OA,FA
7-56
PROBLEM 7-18A b. (cont.)City Corp.
General Journal 2001 and 2002
Date Account Titles Debit Credit20011. Cash 36,400
Discount on Notes Payable 3,600Notes Payable 40,000
2. Selling and Adm. Expenses 118,000Cash 118,000
3. Cash 176,000Service Revenue 176,000
4. Interest Expense* 2,700Discount on Notes Payable 2,700
Closing Entries
5. cl Service Revenue 176,000Selling and Adm. Expenses 118,000Interest Expense 2,700Retained Earnings 55,300
20021. Cash 292,000
Service Revenue 292,000
2. Selling and Adm. Expenses 198,000Cash 198,000
3a. Interest Expense* 900Discount on Notes Payable 900
3b. Notes Payable 40,000Cash 40,000
*2001: $3,600 x 9/12 = $2,700 2002: $3,600 x 3/12 = $900PROBLEM 7-18A b. (cont.)
7-57
City Corp.General Journal, 2001 and 2002
2002 Closing Entries
4. cl Service Revenue 292,000Selling and Adm. Expenses 198,000Interest Expense 900Retained Earnings 93,100
7-58
PROBLEM 7-18A b. (cont.)
City Corp. T-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Notes Payable Retained Earnings2001 2001 20011. 36,400 2.
118,0001. 40,000 cl 55,300
3. 176,000 Bal.40,000
Bal.55,300
Bal.94,400 2002 20022002 3b. 40,000 cl 93,1001. 292,000 2.
198,000Bal. -0- Bal.
148,4003b.40,000
Bal.148,400
Discount on Notes Pay.
Service Revenue
2001 20011. 3,600 4. 2,700 cl176,000 3. 176,000Bal. 900 Bal. -0-2002 2002
3a. 900 cl 292,000 1.292,000
Bal. -0- Bal. -0-
Selling and Adm. Exp.
20012. 118,000 cl
118,000Bal. -0-20022. 198,000 cl 198,000Bal. -0-
Interest Expense20014. 2,700 cl 2,700Bal. -0-20023a. 900 cl 900
7-59
Bal. -0-
7-60
PROBLEM 7-18A (cont.) c.
City Corp.Financial Statements
Income Statements
2001 2002
Service Revenue $176,000 $292,000
ExpensesSelling and Adm.
Expenses118,000 198,000
Interest Expense 2,700 900
Total Expenses (120,700) (198,900)
Net Income $ 55,300 $ 93,100
Statements of Changes in Stockholders’ Equity
2001 2002
Beginning Common Stock
$ -0- $ -0-
Plus: Stock Issued -0- -0-Ending Common Stock -0- -0-
Beginning Retained Earnings
-0- 55,300
Plus: Net Income 55,300 93,100Ending Retained Earnings
55,300 148,400
Total Stockholders’ Equity
$ 55,300 $148,400
7-61
PROBLEM 7-18A c. (cont.)
City Corp.Financial Statements
Balance Sheets
2001 2002
AssetsCash $94,400 $148,40
0Total Assets $94,400 $148,40
0
LiabilitiesNotes Payable $40,000 $ -0-Less: Discount on Notes Payable (900) -0-
Total Liabilities 39,100 -0-
Stockholders’ EquityCommon Stock -0- -0-Retained Earnings 55,300 148,400
Total Stockholders’ Equity 55,300 148,400
Total Liabilities and Stockholders’ Equity
$94,400 $148,400
7-62
PROBLEM 7-18A c. (cont.)
City Corp. Statements of Cash Flows
2001 2002
Cash Flows From Operating Activities:
Inflow from Customers $176,000 $292,000Outflow for Expenses (118,000
)(198,000
)Ouflow for Interest -0- (3,600)
Net Cash Flow from Operating Activities
58,000 90,400
Cash Flows From Investing Activities
-0- -0-
Cash Flows From Financing Activities:
Cash Inflow from Loan 36,400Cash Ouflow to Repay Loan (36,400)
Net Cash Flow From Financing Activities
36,400 (36,400)
Net Change in Cash 94,400 54,000Plus: Beginning Cash Balance -0- 94,400Ending Cash Balance $ 94,400 $148,400
7-63
PROBLEM 7-19A
Event
Type of
EventAssets Liabilitie
s
Common Stock
Retained
Earnings
Net Incom
e
Cash Flow
a. AS + NA NA + + +b. AU NA NA c. AS + NA NA + + NAd. AU NA NA NAe. AE + NA NA NA NA +f. AS + NA NA + + +g. AE + NA NA NA NA h. CE NA + NA NAi. AS + NA NA + + NAj. AS + NA NA + + +k. AU NA NA NA l. AE + NA NA NA NA +m. AS + + NA NA NA +n. AU NA NA NA o. CE NA + NA NA
7-64
PROBLEM 7-20ABelmont Equipment Co.
Balance SheetAs of December 31, 2003
AssetsCurrent Assets
Cash $ 17,800Accounts Receivable $90,000Less: Allow. for Doubtful Accounts (4,000) 86,000Merchandise Inventory 122,800Interest Receivable 500Prepaid Rent 9,600Supplies 1,600Notes Receivable 12,000
Total Current Assets $250,300
Property, Plant and EquipmentEquipment 60,000Less: Accumulated Depreciation (30,000) 30,000Land 36,000
Total Property, Plant and Equipment
66,000
Total Assets $316,300
Liabilities and Stockholders’ EquityCurrent Liabilities
Accounts Payable $ 46,000Unearned Revenue 52,600Warranties Payable 1,300Interest Payable 1,800Salaries Payable 9,200
Total Current Liabilities $110,900
Long-Term LiabilitiesNotes Payable 106,000Less: Discount on Notes Payable (2,400)
Total Long-Term Liabilities 103,600
Total Liabilities 214,500
Stockholders’ EquityCommon Stock 40,000Retained Earnings 61,800*
Total Stockholders’ Equity 101,800
Total Liabilities and Stockholders’ Equity
$316,300
7-65
*Must be computed: $10,400 + $59,400 $8,000 = $61,800
7-66
PROBLEM 7-20A (cont.)
Belmont Equipment Co.Income Statement
For the Year Ending December 31, 2003
Sales Revenue $396,000
Cost of Goods Sold (143,000)
Gross Margin 253,000
Operating ExpensesSalaries Expense $96,000Operating Expenses 70,000Warranty Expense 3,400Bad Debts Expense 10,800
Total Operating Expenses (180,200)
Operating Income 72,800
Non-Operating ItemsInterest Revenue 4,200Interest Expense (24,000)Gain on Sale of Equipment 6,400
Total Non-Operating Items (13,400)
Net Income $ 59,400
7-67
PROBLEM 7-21A
T-Accounts provided for the use of the instructor.
Accounts ReceivableBal. 30,000Chg. Sales 240,000 Write-Off 1,600
Coll 240,400End. Bal. 28,000
Allowance for Doubtful AccountsBal. 2,000
Write-Off 1,600 Exp. 1,400End. Bal. 1,800
Notes PayableBal. 40,000End. Bal. 40,000
Discount on Notes PayableBal. 2,400
Exp. 800End. Bal. 1,600
Warranties PayableBal. 3,600
Paid 1,700 Exp. 1,100End. Bal. 3,000
a. Cash collected: $240,400Bad Debts Expense: $1,400Net Realizable Value: $28,000 $1,800 = $26,200
b. Cash paid for warranties: $1,700
c. Interest recognized for the period: $800Cash paid for interest: $-0-Book Value of Discount Note: $40,000 $1,600= $38,400
7-68
PROBLEM 7-22A
Water Way Sales & ServiceGeneral Journal
Date Account Titles Debit Credit
1. Merchandise Inventory 390,000Accounts Payable 390,000
2a. Accounts Receivable 522,000Sales Revenue 522,000
2b. Cost of Goods Sold 364,000Merchandise Inventory 364,000
3. Cash 44,000Service Revenue 44,000
4a. Accounts Receivable - Credit Card Co.
25,080
Credit Card Expense 1,320Sales Revenue 26,400
4b. Cost of Goods Sold 18,600Merchandise Inventory 18,600
5. Cash 504,000Accounts Receivable 504,000
6. Accounts Payable 396,000Cash 396,000
7. Selling and Administrative Expenses
150,000
Cash 150,000
8. Cash 25,080Accounts Receivable - Cr.
Card Co.25,080
9. Cash 55,200Discount on Notes Payable 4,800
Notes Payable 60,000
10. Bad Debts Expense 450
7-69
Accounts Receivable 450PROBLEM 7-22A (cont.)
Water Way Sales & ServiceGeneral Journal
Date Account Titles Debit Credit
Adjusting Entries
11a. Interest Expense* 1,200Discount on Notes Payable 1,200
11b. Warranty Expense 3,090Warranties Payable 3,090
*$4,800 x 3/12 = $1,200
7-70
PROBLEM 7-22A (cont.)
Water Way Sales & ServiceT-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Accounts Payable Common StockBal. 87,100 Bal.
44,000Bal. 90,000
3. 44,000 6. 396,000 6. 396,000 1. 390,000
5. 504,000 7. 150,000
Bal.38,000
Retained Earnings
8. 25,080 Bal. 65,5009. 55,200 Warranties Payable Bal. 65,500Bal.
169,38011b.
3,090Bal. 3,090 Sales Revenue
Accounts Receivable 2a. 522,000
Bal. 17,800
Disc. on Notes Pay. 4a. 26,400
2a. 522,000
5. 504,000
9. 4,800 11a. 1,200
Bal. 548,400
4a. 25,080
8. 25,080 Bal. 3,600
10. 450 Service RevenueBal. 35,350 Notes Payable 3. 44,000
9. 60,000 Bal. 44,000Merchandise Inventory Bal.
60,000Bal. 94,600 Cost of Goods Sold1. 390,000 2b.
364,0002b.364,000
4b. 18,600
4b. 18,600
Bal.102,000 Bal.382,600
Credit Card Expense4a. 1,320Bal. 1,320
Selling & Adm. Exp.7. 150,000Bal.
150,000
Bad Debts Expense
7-71
10. 450Bal. 450
Warranty Expense11b. 3,090Bal. 3,090
Interest Expense11a. 1,200Bal. 1,200
7-72
PROBLEM 7-22A (cont.)
Water Way Sales and ServiceFinancial Statements
For the Year Ended December 31, 2003
Income Statement
Revenue Sales Revenue $548,400 Service Revenue 44,000Total Revenue $592,40
0
Costs and Expenses Cost of Goods Sold 382,600 Bad Debts Expense 450 Credit Card Expense 1,320 Warranty Expense 3,090 Selling & Adm. Expenses
150,000
Total Operating Expenses
(537,460)
Operating Income 54,940
Non Operating Items Interest Expense (1,200)
Net Income $ 53,740
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$90,000
Plus: Stock Issued -0-Ending Common Stock $ 90,000
Beginning Retained Earnings
65,500
7-73
Plus: Net Income 53,740Ending Retained Earnings
119,240
Total Stockholders’ Equity
$209,240
PROBLEM 7-22A (cont.)
Water Way Sales and ServiceBalance Sheet
As of December 31, 2003
AssetsCash $169,38
0Accounts Receivable 35,350Merchandise Inventory 102,000
Total Assets $306,730
LiabilitiesAccounts Payable $38,000Warranties Payable 3,090Notes Payable $ 60,000Less, Discount on Note (3,600) 56,400
Total Liabilities 97,490
Stockholders’ EquityCommon Stock 90,000Retained Earnings 119,240
Total Stockholders’ Equity 209,240
Total Liab. and Stockholders’ Equity
$306,730
7-74
PROBLEM 7-22A (cont.)
Water Way Sales and ServiceStatement of Cash Flows
For the Year Ended December 31, 2003
Cash Flows From Operating Activities:
Cash Receipts from Revenue $573,080Cash Payment for Inventory (396,000)Cash Payments for Expenses (150,000)
Net Cash Flow from Operating Activities
$ 27,080
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Inflow from Note 55,200Net Cash Flow from Financing Activities
55,200
Net Change in Cash 82,280Plus: Beginning Cash Balance 87,100Ending Cash Balance $169,380
7-75
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 7
EXERCISE 7-1Ba. and c.
Smith Dry CleaningT-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Retained Earnings2003 20032. 8,000 cl 9,900Bal.
8,000 Bal.
9,900
20043. 10,000 Service RevenueBal.
18,000 2003
cl 10,000
1. 10,000
Accounts Receivable Bal.
-0-
2003 20041. 10,000 2. 8,000 2. 12,000Bal.
2,000 Bal.
12,000
20042. 12,000 1. 80 Bad Debts Expense
3. 10,000 2003
Bal.
3,920 3. 100 cl 100
Bal.
-0-
Allow. For Bad Debts 2004
2003 4. 120 3. 100 Bal
.120
Bal.
100
2004
7-76
1. 80 4. 120 Bal.
140
Year 2004 closing entries are not shown. They are not needed to answer the questions
7-77
EXERCISE 7-1B (cont.)
b. (1) Net Income for 2003: $9,900 ($10,000 $100)(2) Net Cash Flow from Operating Activities:$8,000(3) Balance of Accounts Receivable, 12/31/2003:
$2,000(4) Net Realizable Value of Accounts Receivable,
12/31/2003: $1,900($2,000 $100)
c. (1) Net Income for 2004: $11,880 ($12,000 $120)(2) Net Cash Flow from Operating Activities:
$10,000(3) Balance of Accounts Receivable, 12/31/2004:
$3,920(4) Net Realizable Value of Accounts Receivable,
12/31/2004: $3,780 ($3,920 $140)
7-78
EXERCISE 7-2B
Event Assets = Liab.
+ Stk. Equity
Rev. – Exp. = Net Inc.
Cash Flow
Cash A. Rec.
All for DA
= + Ret. Earn.
1. NA + NA = NA + + + NA = + NA2. + NA = NA + NA NA NA = NA + OA3. NA = NA + NA NA NA = NA NA4. NA NA + = NA + NA + = NA
7-79
EXERCISE 7-3B
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance $ 1,500
Plus: Revenue on Account 7,000Less: Write-off (80)Less: Ending Balance (2,000
)Collections of Accounts Rec.
$ 6,420
b. Analyze the Allowance for Doubtful Accounts account:
Allowance for Doubtful Accounts
Beginning Balance $150Less: Write-off (80)Less: Ending Balance (175)Bad Debts Expense $105
Note to Instructor: This information can also be shown in T-Account format.
7-80
EXERCISE 7-4B
Selected T-Accounts:
Cash Allowance for Doubt Acct.
Sales Revenue
2008 12/31/07 20082. 900 Bal. 3,000 3.
200,0004.190,000 2008
1. 3,500 2. 900Accounts Receivable 5. 4,000 Bad Debts Expense
12/31/07 Bal. 4,400 2008Bal.
80,0005. 4,000
20082. 900 1. 3,5003.200,000 2. 900
4.190,000
Bal.86,500
2008 transactions:1. Bad accounts written off: $3,5002a. Reinstated previously written-off accounts: 9002b. Collected previously written off accounts: 9003. Sales on account: 200,0004. Collections of accounts receivable: 190,0005. Bad Debts Expense; (200,000 x 2%)
4,000
a. 1. Allowance for Doubtful Accounts, 12/31/08:$ 4,4002. Accounts Receivable, 12/31/08: 86,5003. Net Realizable Value ($86,500 – $4,400): 82,100
b. Bad Debts Expense 2008 ($200,000 x 2%): $4,000
c. The recovery of the previously written off accounts will not affect the income statement. The transaction is an
7-81
asset exchange transaction. The income statement is only affected when bad debts expense is recognized.
7-82
EXERCISE 7-5B
Accounts Receivable Allowance for Doubt. Accts.Cr. Sales 300,000 Coll. 260,000 Chg. Off 250 Est. 3,000
Chg. Off 250 Bal. 2,750
Bal. 39,750
a. 1. $39,750 (see above)
2. $2,750
3. $3,000 ($300,000 x 1%)
4. $39,750 $2,750 = $37,000
b.1. $39,750 (same as above)
2. $250 (the amount charged off)
3. $39,750 (the balance of accounts receivable)
7-83
EXERCISE 7-6Ba.
Valley Service Co.Horizontal Statements Model
Balance Sheet Income Statement Statement ofEvent
Assets = Liab.
+ S. Equity
Rev. – Exp. = Net Inc.
Cash Flows
Cash + Acct. Rec.
= + Ret. Ear.
20051. 10,000 + NA = NA + 10,000 10,00
0 NA = 10,000 10,000 OA
2. NA + 2,000 = NA + 2,000 2,000 NA = 2,000 NA3. (8,000) + NA = NA + (8,000) NA 8,000 = (8,000) (8,000) OA4. NA + (70) = NA + (70) NA 70 = (70) NABal. 2,000 + 1,930 = NA + 3,930 12,00
0 8,070 = 3,930 2,000
b. Net Income for 2005: $3,930
7-84
EXERCISE 7-6B (cont.)c.
Valley Service Co.General Journal
Date Account Titles Debit Credit
20051. Cash 10,000
Sales Revenue 10,000
2. Accounts Receivable 2,000Sales Revenue 2,000
3. Operating Expenses 8,000Cash 8,000
4. Bad Debts Expense 70Accounts Receivable 70
7-85
EXERCISE 7-7Ba.
Denver One-Day SpaHorizontal Statements Model
Balance Sheet Income Statement Statement of
Assets = Liab.
+ S. Equity
Rev. Exp. = Net Inc.
Cash Flows
Event
Cash + Acct. Rec.
= + Ret. Ear
1. NA + 114,000 = NA + 114,000
120,000
6,000
= 114,000
NA
2. 114,000
+ (114,000)
= NA + NA NA NA = NA 114,000 OA
b. 1. Total assets: Cash $114,000
2. Revenue recognized: $120,000
3. Cash Flow from Operating Activities:$114,000
4. If a business maintains its own accounts receivable, i.e. it sells goods on account, it must incur the cost of investigating customers in order to extend credit. Then, the customer must be sent bills each month. If a customer is slow paying, collection notices must be sent, and finally other collection expense and bad debt charge off may occur. If a business uses credit cards for its credit business, the only expense is the fee charged by the credit card company.
7-86
7-87
EXERCISE 7-8B
a. & b.Event
Account Title Debit Credit
a. Accounts Receivable 2,880Credit Card Expense ($3,000 x 4%)
120
Sales Revenue 3,000
b. Cash 2,880Accounts Receivable 2,880
c. Net Income Sales $3,000Credit Card Expense (120 ) Net Income $2,880
7-88
EXERCISE 7-9BNote: T-Accounts are provided for the use of the instructor.
Assets = Liabilities + Stockholders’ Equity
Cash Warranties Payable
Sales Revenue
Sales140,000
Pur.95,000
Pd. 200 Est. 8,400 Sales 140,000
Pd. 200 Bal. 8,200Bal.44,800
Cost of Goods Sold
Sold95,000
Mdse. InventoryPur.95,000
Sold95,000
Warranty Expense
Bal. -0- Est. 8,400
Long’s StereosFinancial Statements
Income Statement
Sales Revenue $140,000
Cost of Goods Sold (95,000)
Gross Margin 45,000
Warranty Expense (8,400)
Net Income $ 36,600
Statement of Cash Flows
Cash Flows From Operating Activities:Inflow from Customers $140,00
0Outflow for Inventory (95,000)Outflow for Warranty Expense (200)
Net Cash Flow from Operating Activities
$44,800
Cash Flows From Investing Activities -0-
Cash Flows From Financing Activities -0-
7-89
Net Change in Cash 44,800Plus: Beginning Cash Balance -0-Ending Cash Balance $44,800
7-90
EXERCISE 7-9B (cont.)
Total warranties liabilities at the end of the period is $8,200, the balance of the Warranties Payable account.
7-91
EXERCISE 7-10Ba.
Event
Assets
=Liab.
+ S. Equity
Rev.
Exp.
= Net Inc.
Cash Flow
Est. NA = + + NA + = NAPd. = + NA NA NA = NA OA
Event Account Titles Debit Credit
b.Est. Warranty Expense 1,400
Warranties Payable 1,400
c.Payment
Warranties Payable 596
Cash 596
d. Warranty obligations may be uncertain, but they usually represent legal liabilities that must be recognized in the accounts.
7-92
EXERCISE 7-11B
Cash Notes Payable Service Revenue1.
180,0001. 200,000 2. 55,000
2. 55,000 Bal.200,000
Bal.55,000
Bal.235,000
Disc. on Notes Pay. Interest Expense1. 20,000 3. 15,000 3. 15,000*
Bal. 5,000 Bal.15,000
* $20,000 x 9/12 = $15,000
a. Total Liabilities:Notes Payable $200,000Less: Discount on Notes Payable
(5,000)
Total Liabilities $195,000
b. Income Reported on the Income Statement:Service Revenue $55,000Less: Interest Expense (15,000)Net Income $40,000
c. Cash Flows From Operating Activities:Inflow from Customers $55,000
7-93
EXERCISE 7-11B (cont.)d.
Davis General Journal
Date Account Titles Debit Credit
4/1/04 Cash 180,000Discount on Notes Payable 20,000
Notes Payable 200,000
12/31/04
Interest Expense 15,000
Discount on Notes Payable 15,000
3/31/05 Interest Expense 5,000Discount on Notes Payable 5,000
3/31/05 Notes Payable 200,000Cash 200,000
7-94
EXERCISE 7-12Ba.
Balance Sheet Income Statement Statement of
Event
Assets
= Liabilities + S. Equity
Rev. Exp. = Net Inc.
Cash Flows
Cash = Notes Pay.
Disc. on NP
+ Ret. Ear.
1. 27,000
= 30,000 3,000 + NA NA NA = NA 27,000 FA
Balance Sheet Income Statement Statement of
Event
Assets
= Liabilities + S. Equity
Rev. Exp. = Net Inc. Cash Flows
Cash = Notes Pay.
+ Int. Pay. + Ret. Ear.
2. 30,000
= 30,000 + NA + NA NA NA = NA 30,000 FA
b. Discount Note: 30,000 x 10% = $3,000Interest-bearing Note: 30,000 x 10% = $3,000
c. Discount Note: Principal $27,000Interest-bearing Note: Principal $30,000
d. Effective Interest Rate = Interest Paid Principal Amount
Discount Note: $3,000 $27,000 = 11.11%
7-95
Interest-bearing Note: $3,000 $30,000 = 10%
The effective interest rate is higher for the discount note. Both notes paid the same amount of interest, but only $27,000 of cash was received from the loan for the discount note.
7-96
EXERCISE 7-13B
Lewis Co.General Journal
Date Account Titles Debit Credit
a.7/1/05 Cash 35,200
Discount on Notes Payable 4,800Notes Payable 40,000
b.12/31/05
Interest Expense* 2,400
Discount on Notes Payable 2,400
c.6/30/06 Interest Expense** 2,400
Discount on Notes Payable 2,400
6/30/06 Notes Payable 40,000Cash 40,000
*$4,800 x 6/12 = $2,400**$4,800 x 6/12 = $2,400
7-97
EXERCISE 7-14Ba.
Phillips Metal Co. T-Accounts, 2005
Assets = Liabilities + Stockholders’ Equity
Cash Accounts Payable Common StockBal. 4,000 Bal.
10,000Bal.20,000
1. 4,000 7. 2,000 10.68,000
2. 80,000 1. 4,000
6. 9,100 8. 16,000 Bal.22,000
Bal.24,000
9.133,200
10.68,00011. 2,000 Warranties Payable Retained Earnings
Bal.62,300
7. 2,000 4. 6,400 Bal.33,000
Bal. 4,400Accounts Receivable Dividends
Bal.20,000
11. 2,000
3a. 128,000
5. 800 Notes Payable Bal. 2,000
9.133,200
6. 10,000
Bal. 14,000
Bal.10,000
Sales Revenue
3a.128,000
Allow. For Doubt. Acct.
Discount on Notes Pay.
Bal.128,000
Bal.1,000 6. 900 13. 3005. 800 12. 1,280 Bal. 600 Cost of Goods Sold
Bal.1,480 3b. 76,000Bal.76,000
Merchandise Inventory
Bal.40,000
Warranty Expense
2. 80,000 3b.76,000
4. 6,400
Bal.44,000
Bal. 6,400
Operating Expenses
7-98
8. 16,000Bal.16,000
Bad Debts Expense12. 1,280Bal. 1,280
Interest Expense13. 300Bal. 300
4: $128,000 x 5% = $6,4006: $10,000 x 9% = $90012: $128,000 x 1% =$1,28013: $900 x 4/12 = $300
7-99
EXERCISE 7-14B (cont.)
b.Phillips Metal CompanyFinancial Statements
For the Year Ended December 31, 2005
Income Statement
Sales Revenue $128,000
Cost of Goods Sold (76,000)
Gross Margin 52,000
Operating ExpensesOperating Expenses $16,000Warranty Expense 6,400Bad Debts Expense 1,280
Total Operating Expenses (23,680)
Operating Income 28,320Interest Expense (300)
Net Income $28,020
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$20,000Plus: Stock Issued 4,000Ending Common Stock $24,000
Beginning Retained Earnings
33,000
Plus: Net Income 28,020Less: Dividends (2,000)Ending Retained Earnings 59,020
Total Stockholders’ Equity $83,020
7-100
7-101
EXERCISE 7-14B b. (cont.)
Phillips Metal Co.Balance Sheet
As of December 31, 2005
AssetsCash $
62,300Accounts Receivable $14,000Less: Allowance for Doubtful
Accounts(1,480) 12,520
Merchandise Inventory 44,000Total Assets $118,82
0
LiabilitiesAccounts Payable $
22,000Warranties Payable 4,400Notes Payable $10,000Less: Discount on Notes Payable (600) 9,400
Total Liabilities 35,800
Stockholders’ EquityCommon Stock 24,000Retained Earnings 59,020
Total Stockholders’ Equity 83,020
Total Liabilities and Stockholders’ Equity
$118,820
7-102
EXERCISE 7-14B b. (cont.)
Phillips Metal Co.Statement of Cash Flows
For the Year Ended December 31, 2005
Cash Flows From Operating Activities:
Inflow from Customers $133,200
Outflow for Inventory (68,000)Outflow for Expenses (18,000)
Net Cash Flow from Operating Activities
$47,200
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Stock Issue 4,000Outflow for Dividend (2,000)Inflow from Loan 9,100
Net Cash Flow from Financing Activities
11,100
Net Change in Cash 58,300Plus: Beginning Cash Balance 4,000Ending Cash Balance $62,30
0
7-103
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 7
PROBLEM 7-15Ba.
Event Number
Type of Transaction
20051. Asset Source2. Asset Exchange3. Asset Use
20061. Asset Source2. Asset Exchange3. Asset Exchange4a. Asset Exchange4b. Asset Exchange5. Asset Use6. Asset Use
b. 2005 and 2006Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Equity
Rev. Exp. =Net Inc. Cash Flows
2005 1. + NA + + NA + NA 2. + NA NA NA NA NA + OA 3. NA NA + NA
2006 1. + NA + + NA + NA 2. + NA NA NA NA NA + OA 3. + NA NA NA NA NA NA 4a.* + NA NA NA NA NA NA 4b. + NA NA NA NA NA + OA 5. NA NA + OA 6. NA NA + NA
*Transaction 4a is the reinstatement of the previously written-off account; 4b is the collection of the account.
7-104
PROBLEM 7-15B (cont.)
c.
J & J Company
Date Account Titles Debit Credit
20051. Accounts Receivable 255,000
Service Revenue 255,000
2. Cash 159,000Accounts Receivable 159,000
3. Operating Expenses 150,000Cash 150,000
4. Bad Debts Expense* 2,550Allowance for Doubtful
Accounts2,550
*$255,000 x 1% = $2,550
J & J Company T-Accounts 2005
Assets = Stockholders’ Equity
Cash Accounts Receivable
Service Revenue
2. 159,000 3.150,000
1. 255,000 2.159,000
1. 255,000
Bal. 9,000 Bal.96,000 Bal. 255,000
Allow. For Doubtful Accounts
Bad Debts Expense
4. 2,550 4. 2,550
Bal.2,550 Bal. 2,550
Operating
7-105
Expenses3.
150,000Bal.
150,000
7-106
PROBLEM 7-15B (cont.)d.
J & J CompanyFinancial Statements
For the Year Ended 2005
Income Statement
Service Revenue $255,000
ExpensesOperating Expenses 150,000Bad Debts Expense 2,550
Total Expenses 152,550
Net Income $102,450
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued -0-Ending Common Stock $ -0-
Beginning Retained Earnings
-0-
Plus: Net Income 102,450Ending Retained Earnings
102,450
Total Stockholders’ Equity
$102,450
7-107
PROBLEM 7-15B d. (cont.)
J & J CompanyFinancial Statements
Balance Sheet As of December 31, 2005
AssetsCash $
9,000Accounts Receivable $96,000Less: Allowance for Doubtful
Accounts(2,550) 93,450
Total Assets $102,450
Liabilities $ -0-
Stockholders’ EquityCommon Stock $ -0-Retained Earnings 102,450
Total Stockholders’ Equity 102,450
Total Liabilities and Stockholders’ Equity
$102,450
Statement of Cash FlowsFor the Year Ended December 31, 2005
Cash Flows From Operating Activities:
Inflow from Customers $159,000Outflow for Expense (150,000)
Net Cash Flow from Operating Activities
$9,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing -0-
7-108
Activities
Net Change in Cash 9,000Plus: Beginning Cash Balance -0-Ending Cash Balance $9,000
7-109
PROBLEM 7-15B (cont.) e.
J & J Company
Date Account Titles Debit Credit
2006 Closing Entries1. Service Revenue 255,000
Retained Earnings 255,000
2. Retained Earnings 152,550Operating Expenses 150,000Bad Debts Expense 2,550
J & J CompanyT-Accounts 2005 Closing Entries
Assets = Stockholders’ Equity
Cash Accounts Receivable
Retained Earnings
Bal. 9,000 Bal.96,000 2. 152,550 1. 255,000Bal.102,450
Allowance for Doubtful Accounts Service Revenue
Bal.2,550 1. 255,000 Bal.255,000Bal. -0-
Operating Expenses
Bal.150,000
2.150,000
Bal. -0-
Bad Debts Expense
Bal. 2,550 2. 2,550
Bal. -0-
7-110
PROBLEM 7-15B e. (cont.)J & J Company
After Closing Trial BalanceDecember 31, 2005
Account Title Debit Credit
Cash $ 9,000Accounts Receivable 96,000Allowance for Doubtful Accounts
$ 2,550
Retained Earnings 102,450
Totals $105,000 $105,000
7-111
PROBLEM 7-15B (cont.)
c. (2006)
J & J Company
Date Account Titles Debit Credit
20061. Accounts Receivable 408,000
Service Revenue 408,000
2. Cash 411,000Accounts Receivable 411,000
3. Allowance for Doubtful Accounts
1,800
Accounts Receivable 1,800
4a. Accounts Receivable 600Allowance for Doubtful
Accounts600
4b. Cash 600Accounts Receivable 600
5. Operating Expenses 126,000Cash 126,000
6. Bad Debts Expense* 2,040Allowance for Doubtful
Accounts2,040
*$408,000 x .5% = $2,040
7-112
PROBLEM 7-15B c. (cont.)
2006J & J Company
T-Accounts 2006
Assets = Stockholders’ Equity
Cash Accounts Receivable
Retained Earnings
Bal. 9,000 Bal.96,000 Bal.102,450
2. 411,000 5.126,000
1. 408,000 2.411,000
4b. 600 4a. 600 3. 1,800 Service RevenueBal.
294,6004b. 600 1. 408,000
Bal. 91,200
Bal.408,000
Allow. For Doubtful Accounts
Bad Debts Expense
Bal.2,550 6. 2,040
3. 1,800 4a. 600 Bal. 2,0406. 2,040
Bal.3,390 Operating Expenses
5. 126,000
Bal.126,000
7-113
PROBLEM 7-15B
d. (2006)J & J Company
Financial StatementsFor the Year Ended 2006
Income Statement
Service Revenue $408,000
ExpensesOperating Expenses $126,000Bad Debts Expense 2,040
Total Expenses (128,040)
Net Income $279,960
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued -0-Ending Common Stock $ -0-
Beginning Retained Earnings
102,450
Plus: Net Income 279,960Ending Retained Earnings
382,410
Total Stockholders’ Equity
$382,410
7-114
PROBLEM 7-15B d. (cont.)2006
J & J CompanyFinancial Statements
Balance Sheet As December 31, 2006
AssetsCash $294,60
0Accounts Receivable $ 91,200Less: Allowance for Doubtful
Accounts(3,390) 87,810
Total Assets $382,410
Liabilities $ -0-
Stockholders’ EquityCommon Stock $ -
0-Retained Earnings 382,410
Total Stockholders’ Equity 382,410
Total Liabilities and Stockholders’ Equity
$382,410
Statement of Cash FlowsFor the Year Ended December 31, 2006
Cash Flows From Operating Activities:
Inflow from Customers $411,600Outflow for Expenses (126,000
)Net Cash Flow from Operating Activities
$285,600
Cash Flows From Investing Activities
-0-
7-115
Cash Flows From Financing Activities
-0-
Net Change in Cash 285,600Plus: Beginning Cash Balance 9,000Ending Cash Balance $294,60
0
7-116
PROBLEM 7-15B (cont.) e. (2006)
J & J Company
Date Account Titles Debit Credit
2006 Closing Entries1. Service Revenue 408,000
Retained Earnings 408,000
2. Retained Earnings 128,040Operating Expenses 126,000Bad Debts Expense 2,040
J & J CompanyT-Accounts 2006 Closing Entries
Assets = Stockholders’ Equity
Cash Accounts Receivable Retained EarningsBal.
294,600Bal.91,200 Bal.
102,4502. 128,040 1. 408,000
Bal.382,410
Allow. For Doubtful Accounts Service Revenue
Bal.3,390 1. 408,000 Bal.408,000Bal. -0-
Bad Debts ExpenseBal. 2,040 2. 2,040Bal. -0-
Operating ExpensesBal.
126,0002. 126,000
Bal. -0-
7-117
PROBLEM 7-15B e. (cont.)2006
J & J CompanyAfter Closing Trial Balance
December 31, 2006
Account Title Debit Credit
Cash $294,600Accounts Receivable 91,200Allowance for Doubtful Accounts
$ 3,390
Retained Earnings 382,410
Totals $385,800 $385,800
7-118
PROBLEM 7-16Ba.
Sales on Account $300,000
Less: Ending Balance of Accounts Receivable
(58,000)
Collections of Accounts Receivable $242,000
b. Credit Sales $300,000 x 1% = $3,000 of Bad Debts Expense
c.ACE Appliance
General Journal, 2002
Event
Account Title Debit Credit
1. Accounts Receivable 300,000Service Revenue 300,000
2. Cash 242,000Accounts Receivable 242,000
3. Bad Debts Expense 3,000Allowance for Doubtful
Accounts3,000
d. Accounts Receivable Ending Balance $58,000Less: Allowance for Doubtful Accounts (3,000)Net Realizable Value of Accounts
Receivable$55,000
7-119
PROBLEM 7-16B (cont.)e.
ACE Appliance Effect of Events on Financial Statements
Event Assets = Liab + S. Equity Rev. Exp. = Net Inc. Cash FlowsCash + Acct.
Rec. Allow. = NA + Ret.
Earn.1. NA +300,000 NA = NA + 300,000 300,00
0 NA =300,000 NA
2. 242,000 +(242,000)
NA = NA + NA NA NA = NA 242,000 OA
3. NA + NA 3,000 = NA + (3,000) NA 3,000= (3,000) NATotals 242,000 + 58,000 3,000 = -0- + 297,000 300,00
0 3,00
0=297,000 242,000
7-120
PROBLEM 7-17Ba.
Effect of Transactions on Financial Statements
No. Assets = Liabilities
+ S. Equity
Rev. Exp. =Net Inc. Cash Flows
2005 1. + NA + NA NA NA + FA 2. + NA NA NA NA NA OA 3a. + NA + + NA + + OA 3b. + NA + + + + NA 3c. + NA + + NA + NA 3d. NA NA + NA 4. + NA NA NA NA NA + OA 5. + NA NA NA NA NA + OA 6. NA NA + NA 7. NA + NA + NA 8. NA NA + OA
Legend:3a. Cash Sales3b.Credit Card Sales (remember that the credit card expense is recorded)3c. Sales on Account3d.Cost of Sales
7-121
PROBLEM 7-17B (cont.)
b.Byrd Company
General Journal, 2005
Date Account Titles Debit Credit
1. Cash 500,000Common Stock 500,000
2. Merchandise Inventory 1,200,000
Cash 1,200,000
3a. Cash 600,000Sales Revenue 600,000
3b. Accounts Receivable - Credit Card Co.
480,000
Credit Card Expense 20,000Sales Revenue 500,000
3c. Accounts Receivable 500,000Sales Revenue 500,000
3d. Cost of Goods Sold 900,000Merchandise Inventory 900,000
4. Cash 480,000Accounts Receivable - Credit
Card Co.480,000
5. Cash 400,000Accounts Receivable 400,000
6. Bad Debts Expense 5,000Accounts Receivable 5,000
7. Warranty Expense 4,500Warranties Payable 4,500
8. Selling and Administrative Exp. 100,000
7-122
Cash 100,000
PROBLEM 7-17B b. (cont.)
Byrd Company T-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Warranties Payable Common Stock1. 500,000 2.
1,200,000
7. 4,500 1. 500,000
3a.600,000
8. 100,000 Bal.4,500 Bal. 500,000
4. 480,0005. 400,000 Sales RevenueBal.
680,0003a. 600,000
3b. 500,000Accounts Receivable 3c. 500,000
3b.480,000 4. 480,000 Bal. 1,600,000
3c.500,000 5. 400,0006. 5,000 Cost of Goods Sold
Bal.95,000 3d. 900,000Bal.900,000
Merchandise Inventory
2.1,200,000
3d.900,000
Bad Debts Expense
Bal.300,000
6. 5,000
Bal. 5,000
Credit Card Expense3b. 20,000Bal. 20,000
Warranty Expense7. 4,500Bal. 4,500
Selling & Adm. Expenses
8. 100,000
7-123
Bal.100,000
7-124
PROBLEM 7-17B (cont.)c.
Byrd CompanyFinancial Statements
For the Year Ended 2005
Income Statement
Sales Revenue $1,600,000
Cost of Goods Sold (900,000)
Gross Margin 700,000
Operating ExpensesBad Debts Expense $ 5,000Credit Card Expense 20,000Warranty Expense 4,500Selling & Adm. Expenses 100,000
Total Operating Expenses (129,500)
Net Income $ 570,500
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-Plus: Stock Issued 500,000Ending Common Stock $
500,000
Beginning Retained Earnings
-0-
Plus: Net Income 570,500Ending Retained Earnings 570,500
Total Stockholders’ Equity $1,070,500
7-125
PROBLEM 7-17B c. (cont.)
Byrd CompanyBalance Sheet
As of December 31, 2005
AssetsCash $680,000Accounts Receivable 95,000Merchandise Inventory 300,000
Total Assets $1,075,000
LiabilitiesWarranties Payable $ 4,500
Stockholders’ EquityCommon Stock $500,000Retained Earnings 570,500
Total Stockholders’ Equity 1,070,500
Total Liabilities and Stockholders’ Equity
$1,075,000
7-126
PROBLEM 7-17B c. (cont.)
Byrd CompanyStatement of Cash Flows
For the Year Ended December 31, 2005
Cash Flows From Operating Activities:
Inflow from Customers $1,480,000
Outflow for Inventory (1,200,000)
Outflow for Expenses (100,000)Net Cash Flow from Operating Activities
$180,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Inflow from Stock Issue 500,000Net Cash Flow from Financing Activities
500,000
Net Change in Cash 680,000Plus: Beginning Cash Balance -0-Ending Cash Balance $680,00
0
7-127
PROBLEM 7-18B
a.White & Company
Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Equity
Rev. Exp. =Net Inc. Cash Flows
2006 1 + + NA NA NA NA + FA 2. + NA + + NA + + OA 3. NA NA + OA 4. NA + NA + NA
2007 1. + NA + + NA + + OA 2. NA NA + OA 3a. NA + NA + NA 3b. NA NA NA NA OA,FA
7-128
PROBLEM 7-18B (cont.) b.White & Company
General Journal 2006 and 2007
Date Account Titles Debit Credit20061. Cash 180,000
Discount on Notes Payable 20,000Notes Payable 200,000
2. Cash 336,000Service Revenue 336,000
3. Operating Expenses 132,000Cash 132,000
4. Interest Expense1 10,000Discount on Notes Payable 10,000
Closing Entries
5. cl. Service Revenue 336,000Retained Earnings 336,000
cl. Retained Earnings 142,000Operating Expenses 132,000Interest Expense 10,000
20071. Cash 984,000
Service Revenue 984,000
2. Operating Expenses 416,000Cash 416,000
3a. Interest Expense2 10,000Discount on Notes Payable 10,000
3b. Notes Payable 200,000Cash 200,000
1$20,000 x 6/12 = $10,0002$20,000 x 6/12 = $10,000
PROBLEM 7-18B b. (cont.)
7-129
White & CompanyGeneral Journal 2006 and 2007
Date Account Titles Debit Credit
2007 Closing Entries
4. cl Service Revenue 984,000Retained Earnings 984,000
cl Retained Earnings 426,000Operating Expenses 416,000Interest Expense 10,000
7-130
PROBLEM 7-18B b. (cont.)
White & CompanyT-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Notes Payable Retained Earnings2006 2006 20061. 180,000 3. 132,000 1. 200,000 cl142,000 cl 336,0002. 336,000 Bal.
200,000Bal.194,000
Bal.384,000
2007 2007
2007 3b.200,000
cl426,000 cl 984,000
1. 984,000 2. 416,000 Bal. -0- Bal.752,000
3b.200,000
Bal.752,000 Discount on Notes Pay.
Service Revenue
2006 20061. 20,000 4. 10,000 cl336,000 2. 336,000Bal.
10,000Bal. -0-
2007 20073a. 10,000 cl984,000 1. 984,000
Bal. -0- Bal. -0-
Operating Expenses20063.132,000 cl 132,000Bal. -0-20072.416,000 cl 416,000Bal. -0-
Interest Expense20064. 10,000 cl 10,000Bal. -0-20073a.10,000 cl 10,000Bal. -0-
7-131
7-132
PROBLEM 7-18B (cont.) c.
White & CompanyFinancial Statements
Income Statements
2006 2007
Service Revenue$336,000
$984,000
ExpensesOperating Expenses 132,000 416,000Interest Expense 10,000 10,000
Total Expenses (142,000) (426,000)
Net Income $194,000 $558,000
Statements of Changes in Stockholders’ Equity
2006 2007
Beginning Common Stock $ -0- $ -0-Plus: Stock Issued -0- -0-Ending Common Stock -0- -0-
Beginning Retained Earnings
-0- 194,000
Plus: Net Income 194,000 558,000Ending Retained Earnings 194,000 752,000
Total Stockholders’ Equity
$194,000 $752,000
7-133
PROBLEM 7-18B c. (cont.)
White & CompanyBalance Sheets
2006 2007
AssetsCash $384,000 $752,000
Total Assets $384,000 $752,000
LiabilitiesNotes Payable $200,000 $ -0-Less: Discount on Notes Payable (10,000) -0-
Total Liabilities 190,000 -0-
Stockholders’ EquityCommon Stock -0- -0-Retained Earnings 194,000 752,000
Total Stockholders’ Equity 194,000 752,000
Total Liabilities and Stockholders’ Equity
$384,000 $752,000
7-134
PROBLEM 7-18B c. (cont.)
White & CompanyStatements of Cash Flows
2006 2007
Cash Flows From Operating Activities:
Inflow from Customers $336,000 $984,000
Outflow for Expenses (132,000) (416,000)
Ouflow for Interest -0- (20,000)Net Cash Flow from Operating Activities
204,000 548,000
Cash Flows From Investing Activities
-0- -0-
Cash Flows From Financing Activities:
Cash Inflow from Loan 180,000Cash Outflow to Repay Loan (180,00
0)Net Cash Flow From Financing Activities
180,000 (180,000)
Net Change in Cash 384,000 368,000Plus: Beginning Cash Balance -0- 384,000Ending Cash Balance $384,000 $752,00
0
7-135
PROBLEM 7-19B
Event
Type of
EventAssets Liabilitie
s
Common Stock
Retained
Earnings
Net Incom
e
Cash Flow
a. AE + NA NA NA NA b. AS + NA NA + + NAc. AE + NA NA NA NA +d. AS/AE +(+) NA NA + + +e. AS + NA NA + + +f. AU NA NA NA g. AU NA NA h. AS + NA NA + + +i. AU NA NA NA j. AS + + NA NA NA +k. AS + NA NA + + NAl. AU NA NA NAm. CE NA + NA NAn. AE + NA NA NA NA +o. CE NA + NA NA
7-136
PROBLEM 7-20BDaniels Company
Balance SheetAs of December 31, 2004
AssetsCurrent Assets
Cash $ 23,000Accounts Receivable $113,000Less: Allow. for Doubtful
Accounts(7,000) 106,000
Merchandise Inventory 154,000Interest Receivable 800Prepaid Rent 14,000Supplies 3,000Notes Receivable 17,000Total Current Assets $317,800
Property, Plant and EquipmentEquipment 77,000Less: Accumulated Depreciation (38,000) 39,000Land 50,000Total Property, Plant and
Equipment89,000
Total Assets $406,800
Liabilities and Stockholders’ EquityCurrent Liabilities
Accounts Payable $ 60,000Unearned Revenue 58,000Warranties Payable 2,000Interest Payable 3,000Salaries Payable 12,000Total Current Liabilities $135,000
Long-Term LiabilitiesNotes Payable 133,000Less: Discount on Notes Payable (4,000)Total Long-Term Liabilities 129,000
Total Liabilities 264,000
Stockholders’ EquityCommon Stock 52,000Retained Earnings 90,800*
Total Stockholders’ Equity 142,800
Total Liabilities and Stockholders’ Equity
$406,800
7-137
*Must be computed: ($28,800 + $74,000 $12,000 = $90,800)
7-138
PROBLEM 7-20B (cont.)
Daniels CompanyIncome Statement
For the Year Ended December 31, 2004
Sales Revenue $500,000
Cost of Goods Sold (179,000)
Gross Margin 321,000
Operating ExpensesSalaries Expense $122,000Operating Expenses 90,000Warranty Expense 5,000Bad Debts Expense 14,000
Total Operating Expenses (231,000)
Operating Income 90,000
Non-Operating ItemsInterest Revenue 6,000Interest Expense (32,000)Gain on Sale of Equipment 10,000
Total Non-Operating Items (16,000)
Net Income $ 74,000
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PROBLEM 7-21Ba. T-Accounts provided for the use of the instructor.
Accounts ReceivableBal. 30,000Chg. Sales 170,000 Write-off 1,400
Coll 164,600End. Bal. 34,000
Allowance for Doubtful AccountsBal. 1,800
Write-off 1,400 Exp. 1,300End. Bal. 1,700
Cash collected: $164,600Bad Debts Expense: $1,300Net Realizable Value: $34,000 $1,700 = $32,300
b. Note: T-Accounts provided for the use of the instuctor.
Warranties PayableBal. 4,000
Cash Paid 4,600 Exp. 3,600End. Bal. 3,000
Cash paid for warranties: $4,600
c. Note: T-Accounts provided for the use of the instructor.
Note PayableBal. 40,000End. Bal. 40,000
Discount on Note PayableBal. 1,200
Exp. 400End. Bal. 800
Interest recognized for the period: $400Cash paid for interest: $-0-Book Value of Discount Note: $40,000 $800= $39,200
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PROBLEM 7-22Ba.
The Sport ShopGeneral Journal
Date Account Titles Debit Credit
1. Merchandise Inventory 420,000Accounts Payable 420,000
2a. Accounts Receivable 480,000Sales Revenue 480,000
2b. Cost of Goods Sold 288,000Merchandise Inventory 288,000
3a. Cash 240,000Sales Revenue 240,000
3b. Cost of Goods Sold 144,000Merchandise Inventory 144,000
4a. Accounts Receivable - Credit Card Co.
172,800
Credit Card Expense 7,200Sales Revenue 180,000
4b. Cost of Goods Sold 108,000Merchandise Inventory 108,000
5. Cash 526,000Accounts Receivable 526,000
6. Accounts Payable 540,000Cash 540,000
7. Selling and Administrative Expenses
134,000
Cash 134,000
8. Cash 172,800Accounts Receivable - Cr.
Card Co172,800
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PROBLEM 722B a. (cont.)
The Sport ShopGeneral Journal
Date Account Titles Debit Credit
9. Cash 43,200Discount on Notes Payable 4,800
Notes Payable 48,000
10. Allowance for Doubtful Accounts
7,200
Accounts Receivable 7,200
Adjusting Entries
11a. Bad Debts Expense1 4,800Allowance for Doubtful
Accounts4,800
11b. Interest Expense2 2,800Discount on Notes Payable 2,800
11c. Warranty Expense 1,800Warranties Payable 1,800
1$480,000 x 1% = $4,8002$4,800 x 7/12 = $2,800
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PROBLEM 7-22B a. (cont.)
The Sport ShopT-Accounts
Assets = Liabilities + Stockholders’ Equity
Cash Accounts Payable Common StockBal.
118,000Bal.
142,000Bal.720,000
3a.240,000
6.540,000
6.540,000
1. 420,000
5. 526,000 7.134,000
Bal. 22,000 Retained Earnings
8. 172,800 Bal.108,000
9. 43,200 Warranties PayableBal.
426,00011c. 1,800 Sales Revenue
Bal. 1,800 2a.480,000
Accounts Receivable 3a.240,000
Bal.172,000
Discount on Notes Pay.
4a.180,000
2a.480,000
5.526,000
9. 4,800 11b. 2,800 Bal.900,000
4a.172,800
8.172,800
Bal. 2,000
10. 7,200 Cost of Goods SoldBal.
118,800Notes Payable 2b.
288,0009. 48,000 3b.
144,000Allow. for Doubt.
Acc.Bal.
48,0004b.
108,000Bal.10,000
Bal.540,000
10. 7,200 11a.4,800Bal. 7,600 Credit Card Expense
4a. 7,200Merchandise
InventoryBal. 7,200
Bal.690,000
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1. 420,000 2b.288,000
Selling & Adm. Exp.
3b.144,000
7. 134,000
4b.108,000
Bal.134,000
Bal.570,000
Bad Debts Expense11a. 4,800Bal. 4,800
Warranty Expense11c. 1,800Bal. 1,800
Interest Expense11b. 2,800Bal. 2,800
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PROBLEM 7-22B a. (cont.)
The Sport ShopFinancial Statements
For the Year Ended December 31, 2007
Income Statement
Sales Revenue $900,000
Cost of Goods Sold (540,000)
Gross Margin 360,000
Operating ExpensesBad Debts Expense $ 4,800Credit Card Expense 7,200Warranty Expense 1,800Selling and Admin.
Expenses134,000
Total Operating Expenses
(147,800)
Operating Income 212,200
Less: Nonoperating Expense
Interest Expense (2,800)
Net Income $209,400
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$720,000
Plus: Stock Issued -0-Ending Common Stock $ 720,000
Beginning Retained Earnings
108,000
Plus: Net Income 209,400Ending Retained Earnings
317,400
Total Stockholders’ Equity
$1,037,400
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PROBLEM 7-22B a. (cont.)
The Sport ShopBalance Sheet
As of December 31, 2007
AssetsCash $426,000Accounts Receivable $118,800Less: Allowance for Doubtful
Accounts(7,600) 111,200
Merchandise Inventory 570,000
Total Assets $1,107,200
LiabilitiesAccounts Payable $ 22,000Warranties Payable 1,800Notes Payable $ 48,000Less: Discount on Notes Payable (2,000) 46,000
Total Liabilities 69,800
Stockholders’ EquityCommon Stock 720,000Retained Earnings 317,400
Total Stockholders’ Equity 1,037,400
Total Liabilities and Stockholders’ Equity
$1,107,200
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PROBLEM 7-22B a. (cont.)
The Sport ShopStatement of Cash Flows
For the Year Ended December 31, 2007
Cash Flows From Operating Activities:
Inflow from Customers $938,800Outflow for Inventory (540,000
)Outflow for Expenses (134,000
)Net Cash Flow from Operating Activities
$264,800
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Inflow from Loan 43,200Net Cash Flow From Financing Activities
43,200
Net Change in Cash 308,000Plus: Beginning Cash Balance 118,000Ending Cash Balance $426,00
0
b. Net Realizable Value: $111,200 ($118,800 $7,600).
c. Bad Debts Expense using Direct Write-off Method: $7,200
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ATC 7-1Financial Statement Analysis
a. First, calculate the accounts receivable turnover ratio:
$31,888÷$2,895=11.0 times
Next, calculate the average days to collect accounts receivable:
365 days÷11.0=33 days
b. Note 9, page 42, reports “allowances” of $69 (million).
Allow. for doubtful accts. ÷ Acct. Rec. = Uncollectible %
$69÷$2,964=2.3%
c. $2,895÷$9,491=30.5%
d. Note 9, page 42, reports warranty obligations of $467 (million).
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ATC 7-2 a. 1.Bell Card Zore
Total Sales $125,000 $210,000 $195,000Cash Sales 85,000 26,000 120,000Credit Sales 40,000 184,000 75,000Accounts Receivable, 1/1/08 6,200 42,000 8,100Accounts Receivable, 12/31/08 5,600 48,000 7,500Allowance for Doubtful Acct, 1/1/08 186 1,840 405Allowance for Doubtful Acct, 12/31/08 224 1,680 435Bad Debts Expense, 2008 242 1,200 395Uncollectible accounts charged off, 2008 204 1,360 365Collections of accounts receivable, 2008 40,396 176,640 75,235
2. Uncollectible AccountsBell - 2007: $186 $6,200 = .03 or 3%Bell - 2008: $224 $5,600 = .04 or 4%
Card - 2007: $1,840 $42,000 = .044 or 4.4%Card - 2008: $1,680 $48,000 = .035 or 3.5%
Zore - 2007: $405 $8,100 = .05 or 5%Zore - 2008: $435 $7,500 = .058 or 5.8%
3. Credit SalesBell: $40,000 $125,000 = 32%Card: $184,000 $210,000 = 87.6%
Zore: $75,000 $195,000 = 38.5%
4. Accounts Receivable TurnoverBell: $40,000 $5,600 = 7.14Card: $184,000 $48,000 = 3.83Zore: $75,000 $7,500 = 10
c. Card has the highest percentage of sales that are credit sales with 87.6%.
d. Zore appears to be doing the best job of collecting it accounts receivable with just .5% of its charge sales being charged off during the year.A company can screen its charge customers and use aggressive collection policies to keep uncollectible accounts to a minimum.
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ATC 7-3Thinking About the Numbers -- Explaining the Time Needed to Collect Accounts Receivable
a. Retail furniture stores, such as Haverty’s, sell their products directly to consumers. Because furniture purchases represent relatively large dollar amounts for many individuals, they often “finance” these purchases. This is the reason Haverty’s takes about three months on average to collect its receivables; it allows customers a long time to pay, but it charges interest on their accounts receivable during this time.
Ford, by contrast, sells to car dealers, not to the ultimate consumer, so it gets its money relatively fast. Ford also has a “car financing” operation, but that is a separate operation from the manufacturing of cars.
b. The rather short collection period for Boeing will surprise many students. They may suggest that Boeing collects its receivables soon after each airplane is manufactured because it has been “made to order.” This, of course, is only partly true. Boeing bills and collects payments from customers as their airplanes are being produced. If Boeing waited until its airplanes were completed before being paid, it would need to borrow (or get from some other source) a lot of additional money to finance the long production period that airplanes require. Boeing’s workers and suppliers want to be paid as they provide services to Boeing, not after each airplane is completed.
Colgate Palmolive, by contrast, has a rather traditional accounts receivable arrangement with its distributors. The length of time they are given to repay Colgate probably is approximately the same length of time they are expected to need to sell the products to their customers.
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ATC 7-4
a. Accounts Receivable Turnover:
Company Sales Accounts Receivable
Shafer $920,000 $80,000 = 11.5 times
Burgess $450,000 $50,000 = 9.0 times
Average Days to Collect Accounts Receivable:
Company 365 Acct. Rec. Turnover
Shager 365 11.5 = 31.7 days to coll.
Burgess 365 9.0 = 40.56 days to coll.
b. Burgess is more likely to incur a larger cost from the extension of credit because it takes longer to collect from customers.
c. Costs associated with the extension of credit:
1. Cost of credit approval.2. Recording and billing costs of accounts receivable.3. Costs associated with lost opportunities to invest the
cash to produce a return on the investment.4. Salaries, equipment, and supplies that are used in the
collection process.
d. A company may be more willing to extend credit:
1. Because more goods and services can be sold when credit is allowed.
2. To be more competitive with other companies.
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3. To give the buying company time to generate the cash to pay for the goods purchased.
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ATC 7-5
a. First the companies' gross margins must be calculated. Playfair Pigpen
Sales $650,000 $1,000,000 Cost of goods sold 475,000 630,000 Gross margin $175,000 $ 370,000
Gross margin %:Playfair: $175,000 ÷ $650,000 = 26.9%Pigpen: $370,000 ÷ $1,000,000 = 37.0%
Average days to collect receivables:
First, calculate the net realizable value of each company's accounts receivable:
Playfair Pigpen Accounts receivable $105,000 $260,000 Allow. for doubtful accts. 5,000 10,000 Net realizable value $100,000 $250,000
Second, calculate the accounts receivable turnover ratio:Playfair: $650,000 ÷ $100,000 = 6.5 timesPigpen: $1,000,000 ÷ $250,000 = 4.0 times
Finally, calculate the average days to collect accounts receivable:
Playfair: 365 days÷ 6.5 = 56 daysPigpen: 365 days÷ 4.0 = 91 days
b. Pigpen is charging more in relation to cost of goods sold.Gross Margin %:
Playfair: $175,000$650,000=26.9%Pigpen: $370,000$1,000,000=37.0%
c. Pigpen has the larger absolute balance of accounts receivable and it takes a longer time to collect its accounts receivable. Therefore, it will incur the greater financing cost associated with accounts receivable.
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ATC 7-5 (cont.)
d. Based only on the information provided, Playfair probably has the more restrictive credit policies. It is collecting its receivables faster than Pigpen. This suggests Playfair requires repayment more quickly than Pigpen, or that it only grants credit to customers who have a history of paying on time, or both. Of course there are many other factors, such as industry trends, that might explain the difference in average collection periods, but this information is not available to us. In a "real-world" situation, a prudent decision maker would try to obtain more information before making a judgment.
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ATC 7-6
This assignment is designed to test both analytical skills and writing skills.In the memo, students should explain the conceptual difference in the two types of notes. Some points that can be made include:
Interest-bearing note:interest is paid at maturity;the amount of cash proceeds equals the amount of the principal of the note; interest is computed by multiplying the principal of the note by the interest rate.
Discount note:interest is paid in advance;the amount of the cash proceeds equals the face amount of the note less the amount of discount that is deducted;the amount of the discount is determined by multiplying the face amount of the note by the discount rate.
The effective interest rate for each of the notes is computed as follows:
Interest-bearing note: $50,000 x 10% = $5,000 amount of interest$5,000 $50,000 = 10% effective interest rate
Discount note: $50,000 x 9.5% = $4,750 amount of discount$50,000 $4,750 = $45,250 cash proceeds$4,750 $45,250 = 10.5% effective interest rate
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ATC 7-7
a. The direct write-off would affect the accounting equation as follows:
Stockholders’Assets = Liabilities + Equity(45,000) (45,000)
The entry to record the expense would be:
Debit CreditBad Debts Expense 45,000
Accounts Receivable 45,000
Net income would be reduced by the recognition of the $45,000 of bad debts expense. Ending retained earnings would be reduced on the statement of changes in equity. Assets (i.e., accounts receivable) and equity (i.e., retained earnings) would be reduced on the balance sheet. The statement of cash flows would not be affected.
b. The ethical thing to do would be to advise the bank. Because Saunders had knowledge of the uncollectible account, he could not legally attest to the quality of the receivables. If he lies to the bank, he is engaging in criminal fraud and may be subject to prosecution. Remember always, it is best to avoid unethical or illegal behavior at the earliest possible time.
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ATC 7-8Using the EDGAR DatabaseNOTE: This solution was accurate as of December 19, 2001. However, the EDGAR
database is subject to update at any time, so this solution will likely be “dated” at the time you assign this case to your students.
These data are from the December 31, 2000 financial statements and dollar amounts are in thousands.
a. Sales ÷ Accounts Rec. = A/R Turnover$4,247,504 ÷ $538,403 = 7.9 times
365 ÷ 7.9 = 46 days
b. The balance of total accounts receivable was $559,999. (This is the sum of net receivables [$538,403] and the balance in the “allowance” account [$21,596]).
$21,596 ÷ $559,999 = 3.9% of receivables that are not expected to be collected.
c. The liability for warranties was $59,563 (from the footnote for accrued liabilities).
d. Maytag manufactures products under the names of Jenn-Air, Magic Chef, Admiral, Norge and Hoover.
e. Maytag’s financial statements do not disclose the amount of warranty expense, but the footnotes do disclose the amount of warranties that are included in accrued liabilities. Comparing the balance in the warranties liability to the amount of sales reveals that warranty costs appeared to change little from 1999 to 2000. The supporting computations are:
Warranties liability sales;1999 $62,459 $4,323,673 = 1.445%2000 $59,563 $4,247,504= 1.402%Difference: 0.043%
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