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B EXERCISES
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E7-1B (Determining Cash Balance) The controller for Clair Co. is attempting to determine the amount of cash to be reported on its December 31, 2012, balance sheet. The following information is provided. 1. Commercial savings account of $1,200,000 and a commercial checking account balance of $1,800,000 are held at First National Bank of Yojimbo. 2. A money market fund account of $10,000,000, held at Nguyen Co. (a mutual fund organization) permits Clair Co. to write checks on this balance. 3. Travel advances of $360,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction). 4. A separate cash fund in the amount of $3,000,000 is restricted for the retirement of long-term debt. 5. Petty cash fund of $2,000. 6. An I.O.U. from Nyamaan, a company customer, in the amount of $380,000. 7. A bank overdraft of $220,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 8. The company has two certificates of deposit, each totaling $1,000,000. These CDs have a maturity of 120 days. 9. Clair has received a check that is dated January 12, 2013, in the amount of $250,000. 10. Clair has agreed to maintain a cash balance of $1,000,000 at all times at First National Bank of Yojimbo to ensure future credit availability. 11. Clair has purchased $4,200,000 of commercial paper of Sergio Leone Co. which is due in 60 days. 12. Currency and coin on hand amounted to $15,400. Instructions (a) Compute the amount of cash to be reported on Clair Co.s balance sheet at December 31, 2012. (b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2012, balance sheet.

E7-2B (Determine Cash Balance) Presented below are a number of independent situations. Instructions For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account balance $111,000; savings account balance $212,000; cash advance to subsidiary of $500,000; utility deposit paid to electric company $100. 2. Checking account balance $111,000; an overdraft in special checking account at same bank as normal checking account of $5,000; cash held in a bond sinking fund $1,200,000; petty cash fund $500; certified check from customer $1,500. 3. Checking account balance $205,000; postdated check from customer $10,000; cash restricted due to maintaining compensating balance requirement of $100,000; postage stamps on hand $123. cash advance of $5,000 to company executive, payable on demand. 4. Checking account balance at bank $61,000; money market balance at mutual fund (has checking privileges) $275,000; NSF check received from customer $1,600. 5. Checking account balance $171,000; cash restricted for future plant expansion $1,200,000; shortterm Treasury bills $200,000; cash advance received from customer $900 (not included in checking account balance); refundable deposit of $50,000 paid to federal government to guarantee performance on construction contract.

E7-3B (Financial Statement Presentation of Receivables) Rebel Company shows a balance of $428,520 in the Accounts Receivable account on December 31, 2012. The balance consists of the following.
Installment accounts due in 2013 Installment accounts due after 2013 Overpayments to creditors Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan Advances to executives Advance to subsidiary company (made in 2012) $ 21,000 82,000 10,320 261,000 4,200 50,000

Instructions Illustrate how the information above should be shown on the balance sheet of Rebel Company on December 31, 2012.

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E7-4B (Determine Ending Accounts Receivable) Your accounts receivable clerk, Ms. Oommen, to whom you pay a salary of $6,500 per month, has just purchased a new Cadillac. You decided to test the accuracy of the accounts receivable balance of $87,000 as shown in the ledger. The following information is available for your first year in business.
(1) (2) (3) (4) Collections from customers Merchandise purchased Ending merchandise inventory Goods are marked to sell at 50% above cost $203,000 325,000 95,000

Instructions Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account.
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E7-5B (Record Sales Gross and Net) On June 3, Patel Company sold to Pham Inc. merchandise having a sale price of $1,500 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $45, terms n/30, was received by Pham on June 8 from the John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Pham. Instructions (a) Prepare journal entries on the Patel Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered at net of cash discounts. (b) Prepare the journal entry under basis 2, assuming that Pham did not remit payment until July 29.

E7-6B (Recording Sales Transactions) Presented below is information from Quezada Computers Incorporated.
July 1 10 17 30 Sold $10,000 of computers to Robertson Company with terms 2/15, n/60. Quezada uses the gross method to record cash discounts. Quezada received payment from Robertson for the full amount owed from the July 1 transaction. Sold $100,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30. The Clark Store paid Quezada for its purchase of July 17.

Instructions Prepare the necessary journal entries for Quezada Computers.

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E7-7B (Recording Bad Debts) Rodriguez Company reports the following financial information before adjustments.
Debits Accounts Receivable Allowance for Doubtful Accounts Sales (all on credit) Sales Returns and Allowances $25,000 $ 500 225,000 12,500 Credits

Instructions Prepare the journal entry to record Bad Debt Expense assuming Rodriguez Company estimates bad debts at (a) 3% of net sales and (b) 8% of accounts receivable.
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E7-8B (Recording Bad Debts) At the end of 2012 Sanchez Company has accounts receivable of $400,000 and an allowance for doubtful accounts of $20,000. On January 16, 2013, Sanchez Company determined that its receivable from Maximillan Company of $3,000 will not be collected, and management authorized its write-off. Instructions (a) Prepare the journal entry for Sanchez Company to write off the Maximillan receivable. (b) What is the net realizable value of Sanchez Companys accounts receivable before the write-off of the Maximillan receivable? (c) What is the net realizable value of Sanchez Companys accounts receivable after the write-off of the Maximillan receivable?

E7-9B (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Santillan Inc. shows the following balances.
Debits Accounts Receivable Allowance for Doubtful Accounts Sales (all on credit) $180,000 3,500 $1,000,000 Credits

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B Exercises
Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 5% of gross accounts receivable and (b) 1% of net sales.
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E7-10B (Bad-Debt Reporting) The chief accountant for Hollywood Corporation provides you with the following list of accounts receivable written off in the current year.
Date March 31 June 30 September 30 December 31 Customer MGM Corp. Universal Inc. TriStar Inc. Theaters Corp. Amount $ 6,000 10,200 26,500 18,220

Hollywood Corporation follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts. All of Hollywood Corporations sales are on a 60-day credit basis. Sales for the current year total $7,600,000, and research has determined that bad debt losses approximate 1% of sales. Instructions (a) Do you agree or disagree with Hollywoods policy concerning recognition of bad debt expense? Why or why not? (b) By what amount would net income differ if bad debt expense was computed using the percentageof-sales approach?
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E7-11B (Bad DebtsAging) Singh Co. includes the following account among its trade receivables.
Singh Co. 1/1 1/20 3/14 4/12 9/5 10/17 11/18 12/20 Balance forward Invoice #1710 Invoice #2116 Invoice #2412 Invoice #3614 Invoice #4912 Invoice #5681 Invoice #6347 1,400 2,200 2,750 3,420 980 1,720 4,000 1,600 1/28 4/2 4/10 4/30 9/20 10/31 12/1 12/29 Cash (#1710) Cash (#2116) Cash (1/1 Balance) Cash (#2412) Cash (#3614 and part of #2412) Cash (#4912) Cash (#5681) Cash (#6347) 2,200 2,750 310 2,000 1,580 1,720 2,500 1,600

Instructions Age the balance and specify any items that apparently require particular attention at year-end.
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E7-12B (Journalizing Various Receivable Transactions) Presented below is information related to Junket Corp.
August 1 Junket Corp. sold to Sharper Co. merchandise having a sales price of $21,000 with terms 1/10, net/60. Junket records its sales and receivables net. 5 Accounts receivable of $57,000 (gross) are factored with Easy Credit Corp. with recourse at a financing charge of 5%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.) 9 Specific accounts receivable of $30,000 (gross) are pledged to Second Credit Corp. as security for a loan of $20,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.) Sep. 29 Sharper Co. notifies Junket that it is bankrupt and will pay only 20% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable when the discount period passed.)

Instructions Prepare all necessary entries in general journal form for Junket Corp.
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E7-13B (Assigning Accounts Receivable) On April 1, 2012, Somers Company assigns $200,000 of its accounts receivable to Third National Bank as collateral for a $100,000 loan due July 1, 2012. The assignment agreement calls for Somers Company to continue to collect the receivables. Third National Bank assesses a finance charge of 3% of the accounts receivable, and interest on the loan is 8% (a realistic rate of interest for a note of this type). Instructions (a) Prepare the April 1, 2012, journal entry for Somers Company. (b) Prepare the journal entry for Somerss collection of $175,000 of the accounts receivable during the period from April 1, 2012, through June 30, 2012. (c) On July 1, 2012, Somers paid Third National all that was due from the loan it secured on April 1, 2012.

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E7-14B (Journalizing Various Receivable Transactions) The trial balance before adjustment for Kelly Company shows the following balances.
Dr. Accounts Receivable Allowance for Doubtful Accounts Sales $122,000 2,000 $810,000 Cr.

Instructions Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.) 1. To obtain additional cash, Kelly factors without recourse $50,000 of accounts receivable with Easy Finance. The finance charge is 8% of the amount factored. 2. To obtain a one-year loan of $20,000, Kelly assigns $40,000 of specific receivable accounts to B&C Financial. The finance charge is 6% of the loan; the cash is received and the accounts turned over to B&C Financial. 3. The company wants to maintain the Allowance for Doubtful Accounts at 4% of gross accounts receivable. 4. The company wishes to increase the allowance account by 2% of net sales.
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E7-15B (Transfer of Receivables with Recourse) Strassner Corporation factors $262,500 of accounts receivable with Sultanali Financing, Inc. on a with recourse basis. Sultanali Financing will collect the receivables. The receivables records are transferred to Sultanali Financing on August 15, 2012. Sultanali Financing assesses a finance charge of 3% of the amount of accounts receivable and also reserves an amount equal to 5% of accounts receivable to cover probable adjustments. Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2012, for Strassner to record the sale of receivables, assuming the recourse obligation has a fair value of $3,000.

E7-16B (Transfer of Receivables with Recourse) Grace Corporation factors $200,000 of accounts receivable with Kelly Financing, Inc. on a with recourse basis. Kelly Financing will collect the receivables. The receivables records are transferred to Kelly Financing on April 10, 2012. Kelly Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 6% of accounts receivable to cover probable adjustments. Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met. Prepare the journal entry on April 10, 2012, for Grace to record the sale of receivables, assuming the recourse obligation has a fair value of $4,500.

E7-17B (Transfer of Receivables without Recourse) SYKES Corp. factors $100,000 of accounts receivable with KTT Finance Corporation on a without recourse basis on July 1, 2012. The receivables records are transferred to KTT Finance, which will receive the collections. KTT Finance assesses a finance charge of 2% of the amount of accounts receivable and retains an amount equal to 5% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale. Instructions (a) Prepare the journal entry on July 1, 2012, for SYKES Corp. to record the sale of receivables without recourse. (b) Prepare the journal entry on July 1, 2012, for KTT Finance Corporation to record the purchase of receivables without recourse.

E7-18B (Note Transactions at Unrealistic Interest Rates) On July 1, 2012, Taylor Inc. made two sales. 1. It sold land having a fair market value of $500,000 in exchange for a 4-year, zero-interest-bearing promissory note in the face amount of $732,053.70. The land is carried on Taylors books at a cost of $375,000. 2. It rendered services in exchange for a 4%, 8-year promissory note having a face value of $400,000 (interest payable annually). Taylor Inc. recently had to pay 7% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 10% interest.

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B Exercises
Instructions Record the two journal entries that should be recorded by Taylor Inc. for the sales transactions above that took place on July 1, 2012.
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E7-19B (Notes Receivable with Unrealistic Interest Rate) On December 31, 2010, Tran Co. performed environmental consulting services for Hayden Co. Hayden was short of cash, and Tran Co. agreed to accept a $100,000 zero-interest-bearing note due December 31, 2012, as payment in full. Hayden is somewhat of a credit risk and typically borrows funds at a rate of 15%. Tran is much more creditworthy and has various lines of credit at 8%. Instructions (a) Prepare the journal entry to record the transaction of December 31, 2010, for Tran Co. (b) Assuming Tran Co.s fiscal year-end is December 31, prepare the journal entry for December 31, 2011. (c) Assuming Tran Co.s fiscal year-end is December 31, prepare the journal entry for December 31, 2012.

E7-20B (Analysis of Receivables) Presented below is information for Monaco Company. 1. Beginning-of-the-year Accounts Receivable balance was $56,000. 2. Net sales (all on account) for the year were $685,000. Monaco does not offer cash discounts. 3. Collections on accounts receivable during the year were $650,000. Instructions (a) Prepare (summary) journal entries to record the items noted above. (b) Compute Monaco accounts receivable turnover ratio for the year. The company does not believe it will have any bad debts. (c) Use the turnover ratio computed in (b) to analyze Monacos liquidity. The turnover ratio last year was 8.0.

E7-21B (Transfer of Receivables) Use the information for Monaco Company as presented in E7-20B. Monaco is planning to factor some accounts receivable at the end of the year. Accounts totaling $50,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 6% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is $2,000. Instructions (a) Prepare the journal entry to record the sale of the receivables. (b) Compute Monacos accounts receivables turnover ratio for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

10 *E7-22B (Petty Cash) Velez, Inc. decided to establish a petty cash fund to help ensure internal control over

its small cash expenditures. The following information is available for the month of April. 1. On April 1, it established a petty cash fund in the amount of $1,000. 2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows.
Delivery charges paid on merchandise purchased Supplies purchased and used Postage expense I.O.U. from employees Miscellaneous expense $300.00 125.00 165.00 85.00 180.00

3.

The petty cash fund was replenished on April 10. The balance in the fund was $135. The petty cash fund balance was increased $500 to $1,500 on April 20.

Instructions Prepare the journal entries to record transactions related to petty cash for the month of April.
10 *E7-23B (Petty Cash) The petty cash fund of Rifts Dress Shop, a sole proprietorship, contains the following.
1. Coins and currency 2. Postage stamps 3. An I.O.U. from Jake, an employee, for cash advance 4. Check payable to Rifts Dress Ship from lvan, an employee, marked NSF 5. Vouchers for the following: Stamps Printer toner cartridge $ 46.50 12.90 25.00 12.00 $40.00 61.15

101.15 $197.55

The general ledger account Petty Cash has a balance of $200.

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Chapter 7 Cash and Receivables

Instructions Prepare the journal entry to record the reimbursement of the petty cash fund.
10 *E7-24B (Bank Reconciliation and Adjusting Entries) Wang Company deposits all receipts and makes

all payments by check. The following information is available from the cash records.
June 30 Bank Reconciliation Balance per bank Add: Deposits in transit Deduct: Outstanding checks Balance per books Month of July Results Per Bank Balance July 31 July deposits July checks July note collected (not included in July deposits) July bank service charge July NSF check from a customer, returned by the bank (recorded by bank as a charge) $17,300 10,000 8,000 2,000 30 670 Per Books $18,500 11,620 6,200 $14,000 3,080 (4,000) $13,080

Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. (b) Prepare the general journal entry or entries to correct the Cash account.
10 *E7-25B (Bank Reconciliation and Adjusting Entries) Elfen Company has just received the October 31,

2012, bank statement, which is summarized below.

Tri National Bank Balance, October 1 Deposits during October Note collected for depositor, including $40 interest Checks cleared during October Bank service charges Balance, October 31 Disbursements Receipts $47,200 2,040 $54,501 10 Balance $21,361 68,561 70,601 16,100 16,090 16,090

The general ledger Cash account contained the following entries for the month of October.
Cash Balance, October 1 Receipts during October 17,801 45,000 Disbursements in October 45,271

Deposits in transit at October 31 are $4,800, and checks outstanding at October 31 total $1,550. Cash on hand at October 31 is $250. The bookkeeper improperly entered one check in the books at $210.00 which was written for $240.00 for supplies (expense); it cleared the bank during the month of October. Instructions (a) Prepare a bank reconciliation dated October 31, 2012, proceeding to a correct balance. (b) Prepare any entries necessary to make the books correct and complete. (c) What amount of cash should be reported in the October 31 balance sheet?
11 *E7-26B (Impairments) On December 31, 2012, Lloyds Company borrowed $50,663 from London Bank,

signing a 6-year, $100,000 zero-interest-bearing note. The note was issued to yield 12% interest. Unfortunately, during 2015, Lloyds began to experience financial difficulty. As a result, at December 31, 2015, London Bank determined that it was probable that it would receive back only $60,000 at maturity. The market rate of interest on loans of this nature is now 15%. Instructions (a) Prepare the entry to record the issuance of the loan by London Bank on December 31, 2012. (b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2015, by London Bank.

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B Exercises
11 *E7-27B (Impairments) On December 31, 2012, State Construction Company signed a $1,000,000 note to

Third National Bank. The market interest rate at that time was 15%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, State Constructions financial situation worsened. On December 31, 2014, Third National Bank determined that it was probable that the company would pay back only $700,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan. Instructions (a) Determine the amount of cash State Construction received from the loan on December 31, 2012. (b) Prepare a note amortization schedule for Third National Bank up to December 31, 2014. (c) Determine the loss on impairment that Third National Bank should recognize on December 31, 2014.

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