Exercises (Chapter 7 Part 2)

M7-15
In its first month of operations, Literacy for the Illiterate opened a new bookstore and bought
merchandise in the following order: (1) 300 units at $7 on January 1, (2) 450 units at $8 on
January 8, and (3) 750 units at $9 on January 29. The company sold 600 units on January 28.
Calculate Ending Inventory, and Cost of Goods Sold under the (a) FIFO, (b) LIFO, and (c)
weighted average cost flow assumptions. Assume a perpetual inventory system is used.

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M7-14
Aircard Corporation tracks the number of units purchased and sold throughout each accounting
period. Assume a perpetual inventory system is used.
Given the following information, calculate ending inventory and cost of goods sold if Aircard
uses (a) FIFO or (b) LIFO.

Units Unit Cost

July 1 Beginning Inventory 2,000 $40
July 5 Sold 1,000
July 13 Purchased 6,000 44
July 17 Sold 3,000
July 25 Purchased 8,000 50
July 27 Sold 5,000

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Date Transaction Purchase Cost of goods sold Balance

Unit Unit Total Unit Unit Total Unit Unit Total

cost cost cost

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Date Transaction Purchase Cost of goods sold Balance

Unit Unit Total Unit Unit Total Unit Unit Total

cost cost cost

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 In‐class Exercises (Chapter 8 Part 1) 

MCQ 

1. The adjusting entry to record the estimated bad debts in the period credit sales occur
includes a debit to an:
A) asset account and a credit to a liability account.
B) expense account and a credit to an asset account.
C) expense account and a credit to a revenue account.
D) expense account and a credit to a contra-asset account.

2. The adjusting entry used to record the estimated bad debts in the period credit sales occur
decreases:
A) both net income and net accounts receivable.
B) net income and increases liabilities.
C) assets and increases liabilities.
D) both selling expenses and net income.

3. Allowance for Doubtful Accounts is a:

A) permanent account so its balance carries forward to the next accounting period
B) permanent account so its balance is closed (zeroed out) at the end of the accounting period
C) temporary account so its balance is closed (zeroed out) at the end of the accounting period
D) temporary account so its balance carries forward to the next accounting period

4. When the allowance method is used, the entry to record the write-off of specific
uncollectible accounts would decrease:
A) the Allowance for Doubtful Accounts account.
B) Net Income.
C) Accounts Receivable, Net.
D) Bad Debt Expense.

5. Accounts Receivable has a $2,300 balance, and the Allowance for Doubtful Accounts has
a $200 credit balance. An $80 account receivable is written-off. Net receivables (net
realizable value) after the write-off equals:
A) $2,020.
B) $2,100.
C) $2,180.
D) $2,220.

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M8‐3 Reporting Accounts Receivable and recording write‐offs using the allowance method 

On December 31, 2014, Extreme Fitness has adjusted balances of $800,000 in Accounts Receivable 
and $55,000 in Allowance for Doubtful Accounts. On January 2, 2015, the company learns that 
certain customer accounts are not collectible, so management authorizes a write‐off of these 
accounts totaling $10,000. 

a. Show how the company would have reported its receivable accounts on December 31, 2014. 
As of that date, what amount did Extreme Fitness expect to collect? 
b. Prepare the journal entry to write off the accounts on January 2, 2015. 
c. Assuming no other transactions occurred between December 31, 2014, and January 3, 2015. 
Show how Extreme Fitness would have reported its receivable accounts on January 3, 2015. 
As of that date, what amount did Extreme Fitness expect to collect? Has this changed from 
December 31, 2014?  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
M8‐4 Recording recoveries using the allowance method 
Let’s go a bit further with the example from M8‐3. Assume that on February 2, 2015, Extreme 
Fitness received a payment of $500 from one of the customers whose balance had been written off. 
Prepare the journal entries to record this transaction.  
 
 
 
 
 
 
 
 
 
 

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M8‐5 Recording write‐offs and bad debt expense using the allowance method 
Record each transaction listed. 
a. At the end of June, bad debt expense is estimated to be $14,000. 
b. In July, customer balances are written off in the amount of $7,000. 

E8‐4 Recording write‐offs and recoveries 

Prior to recording the following, Elite Electronics, Inc., had a credit balance of $2,000 in its Allowance 
for Doubtful Accounts. 

Required: Prepare journal entries for each transaction. 

a. On August 31, a customer balance for $300 from a prior year was determined to be 
uncollectible and was written off. 
b. On December 15, the customer balance for $300 written off on August 31 was collected in 
full.  

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E8‐9 Recording and determining the effects of write‐offs, recoveries, and bad debt expense 
estimates on the balance sheet and income statement.  

Fraud Investigators Inc. operates a fraud detection service.  

Prepare journal entries for each transaction below. 

a. On March 31, 10 customers were billed for detection services totaling $25,000. 
b. On October 31, a customer balance of $1,500 from a prior year was determined to be 
uncollectible and was written off. 
c. On December 15, a customer paid an old balance of $900, which had been written off in 
a prior year. 
d. On December 31, $500 of bad debts were estimated and recorded for the year.  
 

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 In-class Exercises (Chapter 8 Part 2)

1. Cary Inc. reported net credit sales of $300,000 for the current year. The unadjusted credit
balance in its Allowance for Doubtful Accounts is $500. The company has experienced bad debt
losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what
amount should the company record as an estimate of Bad Debt Expense?

2. XYZ Corp. uses the percentage of credit sales method in determining its bad debt expense.
The following information comes from the accounting records of XYZ Corp.:

Cash sales $ 200,000

Credit sales 800,000
Total sales 1,000,000
Credit balance in the Allowance for Doubtful Accounts 5,000
Bad debt loss rate 3%

What is the estimate of bad debt expense?

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3. (E8-7)
Brown Cow Dairy uses the aging approach to estimate Bad Debt Expense. At its December 31,
2016 (year-end), total Accounts Receivable is $20,000, aged as follows;
(1) 1-30 days past due, $12,000; (2) 31-90 days past due, $5,000; and (3) more than 90
days past due, $3,000. Experience has shown that for each age group, the average loss
rate on the amount of the receivable due to uncollectibility is (1) 5 percent (2) 10 percent,
and (3) 20 percent, respectively. At December 31, 2016 (end of the current year), the
Allowance for Doubtful Accounts balance was $800 (credit) before the end-of-period
adjusting entry is made.

Required:
1. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for
Doubtful Accounts.
2. What amount of Bad Debt Expense should be recorded on December 31, 2016?

Answer

1.

Number of Days Unpaid (Past Due)

Total 1–30 31–90 > 90

Accounts Receivable ($) $ 20,000

Estimated Uncollectible (%)

Estimated Uncollectible ($)

2.

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4. The following summarizes the aging of accounts receivable for Johnston Supplies, Inc. as of
July 31, 2016:

Total
Accounts Historical %
Number of Days Unpaid Receivable Uncollectible
Not yet due $126,500 2%
1-30 days past due 89,200 12%
31-60 days past due 53,600 18%
Over 60 days past due 31,800 35%
The unadjusted balance of the Allowance for Doubtful Accounts of Johnston Supplies, Inc. is a
credit balance in the amount of $28,947 on July 31, 2016. Prepare the required adjusting
entry to record Bad Debt Expense for the year.

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5. (E8-8)
Innovative Tech Inc. uses the aging method to estimate bad debts at year-end. At its December
31 year-end, total Accounts Receivable is $89,000, aged as follows; (1) 1-30 days past due,
$75,000; (2) 31-90 days past due, $10,000; and (3) more than 90 days past due, $4,000.
Experience has shown that for each age group, the average rate of uncollectibility is (1) 10
percent, (2) 20 percent, and (3) 40 percent, respectively. Before the end-of-year adjusting entry
is made, the Allowance for Doubtful Accounts has a $1,600 credit balance at December 31,
2016.
Required:
1. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for
Doubtful Accounts.
2. Prepare the December 31 adjusting entry.
3. Show how the various accounts related to accounts receivable should be shown on the
December 31 balance sheet.

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