Problem 7–1
Requirement 1
Monthly bad debt expense accrual summary.
Bad debt expense (3% x $2,620,000) ... 78,600
Allowance for uncollectible accounts ... 78,600
To record year 2013 accounts receivable write-offs:
Allowance for uncollectible accounts ... 68,000
Accounts receivable ... 68,000
Requirement 2
Bad debt expense ... 4,300
Allowance for uncollectible accounts (below) ... 4,300
Year-end required allowance for uncollectible accounts:
Summary
Percent Estimated
Age Group Amount Uncollectible Allowance
0–60 days $430,000 4% $17,200
61–90 days 98,000 15% 14,700
91–120 days 60,000 25% 15,000
Over 120 days 55,000 40% 22,000
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Solutions Manual, Vol.1, Chapter 7 7–47
Problem 7–1 (concluded)
Allowance for uncollectible accounts:
Beginning balance $54,000
Add: Monthly bad debt accruals 78,600
Deduct: Write-offs (68,000)
Balance before year-end adjustment 64,600 Required allowance (determined above) 68,900 Required year-end increase in allowance $ 4,300
Requirement 3
Bad debt expense for 2013:
Monthly accruals $78,600
Year-end adjustment 4,300
Total $82,900
Balance sheet: Current assets:
Accounts receivable, net of $68,900
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Requirement 1 (a)
Accounts receivable analysis ($ in thousands):
Balance, beginning of year ($580,640 + 6,590) $ 587,230
Add: Credit sales 2,158,755
Less: Cash collections (2,230,065)
Less: Balance end of year ($504,944 + 5,042) (509,986) Accounts receivable written off during year $ 5,934
(b)
Allowance for uncollectible accounts analysis ($ in thousands):
Beginning balance $6,590
Less: Write-offs (from above) (5,934)
Less: Year-end balance (5,042)
Bad debt expense for the current year $4,386
(c)
$4,386 of bad debt expense divided by $2,158,755 in credit sales equals .2% (.002).
Requirement 2
(a) ($ in thousands)
Current year Previous year
Current assets:
Receivables $509,986 $587,230
(b) ($ in thousands)
Bad debt expense would be equal to actual receivables written off
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Solutions Manual, Vol.1, Chapter 7 7–49
Problem 7–3
Requirement 1
2011 2010
($ in thousands)
Accounts receivable, net $39,098 $23,963
Add: Allowances 421 488
Accounts receivable, gross $39,519 $24,451
Requirement 2
($ in thousands)
The answers to this question require an analysis of both gross accounts receivable and the allowance for uncollectible accounts for 2011. First of all, 2011 sales of $369,571 plus the increase in receivables reported in the statement of cash flows indicates cash received from customers of $354,436 ($369,571 – 15,135).
The activity in gross accounts receivable would be: Gross Accounts Receivable
________________________________________ ($ in thousands) Beg. Bal. 24,451 Sales 369,571 354,436 Collections 67 Write-offs _________________ End. Bal. 39,519
The journal entry to record write-offs would be:
Allowance for Uncollectible Accounts ... ... 67
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Considering the allowance for uncollectible accounts in light of these write-offs allows us to solve for bad debt expense:
Allowance for Uncollectible Accounts
________________________________________ ($ in thousands)
488 Beg. Bal. Write-offs 67
0 Bad Debt Expense
_________________
421 End. Bal. Cirrus recognized zero bad debt expense during 2011.
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 7 7–51
Problem 7–4
Requirement 1
To record accounts receivable written off during the year 2013:
Allowance for uncollectible accounts ... 35,000
Accounts receivable ... 35,000
To record collection of account receivable previously written off:
Accounts receivable ... 3,000
Allowance for uncollectible accounts ... 3,000 Cash ... 3,000
Accounts receivable ... 3,000
Requirement 2 (a)
December 31, 2013
Bad debt expense (3% x $1,750,000) ... 52,500
Allowance for uncollectible accounts ... 52,500
(b)
December 31, 2013
Bad debt expense ... 36,700
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Accounts receivable analysis:
Beginning balance $ 462,000
Add: Credit sales 1,750,000
Less: Write-offs (35,000)
Less: Cash collections (1,830,000)
Ending balance $ 347,000
$347,000 x 10% = $34,700 = Required allowance for uncollectible accounts Allowance for uncollectible accounts analysis:
Beginning balance $30,000
Add: Collection of receivable previously written off 3,000
Less: Write-offs (35,000)
Balance before adjustment (2,000) debit balance
Required allowance (determined above) 34,700
Bad debt expense adjustment $36,700
(c)
December 31, 2013
Bad debt expense ... 37,047
Allowance for uncollectible accounts (below) ... 37,047
Required allowance:
Age Group Amount
Percent Uncollectible Estimated Allowance 0–60 days $225,550 4% $ 9,022 61–90 days 69,400 15% 10,410 91–120 days 34,700 25% 8,675 Over 120 days 17,350 40% 6,940 Totals $347,000 $35,047
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 7 7–53
Problem 7–4 (concluded)
Allowance for uncollectible accounts analysis:
Beginning balance $30,000
Add: Collection of receivable previously written off 3,000
Less: Write-offs (35,000)
Balance before adjustment (2,000) debit balance
Required allowance 35,047
Bad debt expense adjustment $37,047
Requirement 3
Accounts receivable – Year-end allowance
(a) $347,000 – [(2,000) + 52,500] = $296,500
(b) $347,000 – 34,700 = $312,300
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Requirement 1
($ in millions)
2009 2008
Accounts receivable, net $837,010 $758,200 Add: Allowances 20,991 23,314 Accounts receivable, gross $858,001 $781,514 Requirement 2
($ in millions)
Analysis of allowance for doubtful accounts
Balance, beginning of year $8,915
Add: Bad debt expense 1,500
Less: Balance end of year (8,863)
Write-offs $1,552
Requirement 3
($ in millions)
Analysis of allowance for sales returns
Balance, end of year $12,128
Add: Actual returns 3,155
Less: Balance beginning of year (14,399)
Estimated sales returns $ 884
Gross sales for the year equal net sales of $6,149,800 + estimated sales returns of $884 = $6,150,684 thousand.
Requirement 4
($ in millions)
Accounts receivable analysis:
Balance, beginning of year $ 781,514
Add: Credit sales 6,150,684
Less: Bad debt write-offs (1,552)
Less: Actual sales returns (3,155)
Less: Balance end of year (858,001)
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 7 7–55
Problem 7–6
Requirement 1
Total face value of notes = $300,000 + 150,000 + 200,000 = $650,000
Balance sheet carrying value = 645,000
Difference is the remaining discount on note 3 $ 5,000 Note 3 is a 6-month note, with three months remaining. Therefore,
$5,000 represents one-half of the total discount of $10,000.
$10,000 ÷ $200,000 = 5% x 12/6 = 10% discount rate. Requirement 2
Total accrued interest receivable $16,000
Less: Interest accrued on note 1:
$300,000 x 10% x 4/12 = (10,000) Interest accrued on note 2 $ 6,000 $6,000 ÷ $150,000 = 4% x 12/6 =8%
Requirement 3
Note 1 $10,000
Note 2 6,000
Note 3 ($200,000 x 10% x 3/12) 5,000
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Requirement 1
Alternative a:
To record the borrowing of $500,000 and signing of a note payable:
July 1, 2013
Cash ... 500,000
Note payable ... 500,000
Alternative b:
To record the transfer of receivables:
July 1, 2013
Cash ($550,000 x 98%) ... 539,000 Loss on transfer of receivables (2% x $550,000) ... 11,000
Accounts receivable ... 550,000 Requirement 2 Alternative a: July, 2013 Cash (80% x $780,000) ... 624,000 Accounts receivable ... 624,000 July 31, 2013 Interest expense($500,000 x 12% x 1/12) ... 5,000 Note payable... 500,000 Cash ... 505,000
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Problem 7–7 (concluded) Alternative b:
$550 of accounts receivable are now held by the bank, and presumably the bank has collected .8 x $550 = $440 during July. Lonergan still holds accounts receivable of ($780 – 550 = $230), so should have collected .8 x $230 = $184 during July.
July 31, 2013
Cash [80% x ($780,000 – 550,000)] ... 184,000
Accounts receivable ... 184,000
Requirement 3
Alternative a. – Note disclosure is required for the assignment of accounts receivable as collateral for the $500,000 note.
Alternative b. – No disclosure is required since the transfer of receivables was made without recourse.
Problem 7–8
Cash (90% x $800,000) ... 720,000 Loss on sale of receivables (to balance) ... 52,000 Receivable from factor ($60,000 fair value – [4% x $800,000]) 28,000
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WALKEN COMPANY Balance Sheet December 31, 2013 Current Assets
Casha €35,000
Accounts receivable (net)b 60,000
a
Walken would net the €40,000 and (€5000) cash balances, yielding a balance of €35,000.
b
Net accounts receivable would be affected as follows: Beginning balance: € 25,000
Credit sales 85,000
Cash collections (30,000)
Receivables factored with Reliable (20,000) Receivables factored with Dependablec -0-
Total €60,000
c
The receivables factored with Dependable don’t qualify for sales treatment, as substantially all risks and rewards of ownership are retained by Walken.
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Solutions Manual, Vol.1, Chapter 7 7–59