Chapter 7

Cash and Receivables

EXERCISES
Exercise 7-1Requirement 1
Sales price = 200 units x $800 = $160,000 x 80% = $128,000
April 6, 2013
Accounts receivable........................................................ 128,000
Sales revenue...............................................................
128,000

April 16, 2013

Cash (99% x $128,000)...................................................... 126,720
Sales discounts (1% x $128,000)........................................
1,280
Accounts receivable....................................................
128,000
Requirement 2
April 6, 2013
Accounts receivable........................................................ 128,000
Sales revenue...............................................................
128,000

May 6, 2013
Cash................................................................................ 128,000
Accounts receivable....................................................
128,000

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2013

7-1

Exercise 7-1 (concluded)

Requirement 3
Requirement 1:
April 6, 2013
Accounts receivable........................................................ 126,720
Sales revenue (99% x $128,000).....................................
126,720

April 16, 2013

Cash................................................................................ 126,720
Accounts receivable....................................................
126,720
Requirement 2:
April 6, 2013
Accounts receivable........................................................ 126,720
Sales revenue (99% x $128,000).....................................
126,720

May 6, 2013
Cash................................................................................ 128,000
Accounts receivable....................................................
126,720
Interest revenue...........................................................
1,280

Exercise 7-2Requirement 1
To record the write-off of receivables.
Allowance for uncollectible accounts..............................
The McGraw-Hill Companies, Inc., 2013
7-2

46,200

Intermediate Accounting, 7/e

Accounts receivable....................................................

46,200

Allowance for uncollectible accounts:

Balance, beginning of year
Deduct: Receivables written off
Balance, before adjusting entry for 2013 bad debts

$68,000
(46,200)
21,800

Required allowance: 3% x $2,223,000

Bad debt expense

(66,690)
$44,890

To record bad debt expense for the year.

Bad debt expense............................................................
Allowance for uncollectible accounts..........................

44,890
44,890

Requirement 2
Current assets:
Accounts receivable, net of $66,690 in allowance
for uncollectible accounts

$2,156,310

Exercise 7-3Requirement 1

March 31, 2013

Note receivable (face amount)............................................
Discount on note receivable ($80,000 x 6%)..................
Sales revenue (difference)..............................................
December 31, 2013
Discount on note receivable ...........................................
Interest revenue ($80,000 x 6% x 9/12)............................

80,000
4,800
75,200
3,600
3,600

March 31, 2014

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2013

7-3

Discount on note receivable ...........................................

Interest revenue ($80,000 x 6% x 3/12)............................

1,200

Cash ................................................................................
Note receivable (face amount).......................................

80,000

1,200
80,000

Requirement 2
$ 4,800 interest for 12 months
$75,200 sales price
= 6.38% = effective interest rate

Exercise 7-4
Cash (difference)................................................................
Loss on sale of receivables (to balance)............................
Receivable from factor ($7,000 fair value $1,000 fee)........
Accounts receivable (balance sold)................................

90,000
4,000
6,000
100,000

Exercise 7-5
Cash (difference)................................................................
Loss on sale of receivables (to balance)............................
Receivable from factor ($7,000 fair value $1,000 fee) .......
Recourse liability ........................................................
Accounts receivable (balance sold)................................

90,000
8,000
6,000
4,000
100,000

Step 1: Accrue interest earned.

Exercise 7-6
September 1, 2013
Interest receivable...........................................................
Interest revenue ($50,000 x 8% x 3/12)............................
The McGraw-Hill Companies, Inc., 2013
7-4

1,000
1,000

Intermediate Accounting, 7/e

Step 2: Add interest to maturity to calculate maturity value.

Step 3: Deduct discount to calculate cash proceeds.
$50,000
4,000
54,000
(4,050)
$49,950

Face amount
Interest to maturity ($50,000 x 8%)
Maturity value
Discount ($54,000 x 10% x 9/12)
Cash proceeds

Step 4: To record a loss for the difference between the cash proceeds and the
notes book value.
September 1, 2013
Cash (proceeds determined above)........................................
Loss on sale of note receivable (difference).......................
Note receivable (face amount).......................................
Interest receivable (accrued interest determined above).....

49,950
1,050
50,000
1,000

Exercise 7-7Requirement 1
Step 1:

Bank Balance to Corrected Balance

Balance per bank statement

Add: Deposits outstanding
Deduct: Checks outstanding
Corrected cash balance
Step 2:

$74,674
8,200
(8,420)
$74,454

Book Balance to Corrected Balance

Balance per books

Deduct:
Service charges
NSF checks
Automatic monthly transfer
Error in recording cash disbursement
($2,000 200)
Corrected cash balance

Alternate Exercise and Problem Solutions

$78,984
(50)
(680)
(2,000)
(1,800)
$74,454
The McGraw-Hill Companies, Inc., 2013
7-5

Requirement 2
To record credits to cash revealed by the bank reconciliation.
Miscellaneous expense (bank service charges)....................
Accounts receivable (NSF checks).....................................
Cash - savings account....................................................
Accounts payable............................................................
Cash............................................................................

50
680
2,000
1,800
4,530

Note: Each of the adjustments to the book balance required journal entries.
None of the adjustments to the bank balance require entries.

The McGraw-Hill Companies, Inc., 2013

7-6

Intermediate Accounting, 7/e

PROBLEMS
Problem 7-1Requirement 1
Monthly bad debt expense accrual summary.
Bad debt expense (2% x $3,800,000).................................
Allowance for uncollectible accounts..........................

76,000
76,000

To record year 2013 accounts receivable write-offs.

Allowance for uncollectible accounts..............................
Accounts receivable....................................................

82,000
82,000

Requirement 2
Bad debt expense ...........................................................
Allowance for uncollectible accounts (below)..............

4,700
4,700

Year-end required allowance for uncollectible accounts:

Summary
Age Group
0-60 days
61-90 days
91-120 days
Over 120 days
Totals

Amount
$ 825,000
220,000
50,000
128,000
$1,223,000

Alternate Exercise and Problem Solutions

Percent
Uncollectible
2%
10%
30%
40%

Estimated
Allowance
$ 16,500
22,000
15,000
51,200
$104,700

The McGraw-Hill Companies, Inc., 2013

7-7

Problem 7-1 (concluded)

Allowance for uncollectible accounts:
Beginning balance
Add: Monthly bad debt accruals
Deduct: Write-offs
Balance before year-end adjustment
Required allowance (determined above)
Required year-end increase in allowance

$106,000
76,000
(82,000)
100,000
104,700
$ 4,700

Requirement 3
Bad debt expense for 2013:
Monthly accruals
Year-end adjustment
Total

$76,000
4,700
$80,700

Balance sheet:
Current assets:
Accounts receivable, net of $104,700 in
allowance for uncollectible accounts

$1,118,300

Problem 7-2Requirement 1

March 31, 2013

Note receivable (face amount)............................................
Discount ($12,000 x 10%)..............................................
Sales revenue (difference)..............................................

April 12, 2013

Accounts receivable........................................................
Sales revenue...............................................................

The McGraw-Hill Companies, Inc., 2013

7-8

12,000
1,200
10,800

10,000
10,000

Intermediate Accounting, 7/e

April 21, 2013

Cash (98% x $10,000)........................................................
Sales discounts (2% x $10,000)..........................................
Accounts receivable....................................................

9,800
200

April 27, 2013

Sales returns....................................................................
Accounts receivable....................................................

8,000

Inventory.........................................................................
Cost of goods sold.......................................................

Alternate Exercise and Problem Solutions

10,000

8,000
6,000
6,000

The McGraw-Hill Companies, Inc., 2013

7-9

Problem 7-2 (continued)

May 30, 2013
Cash (98% x $100,000).......................................................
Loss on sale of receivables (2% x $100,000).....................
Accounts receivable....................................................

98,000
2,000

July 31, 2013

Note receivable ...............................................................
Sales revenue ..............................................................

15,000

100,000

15,000

To accrue interest on note receivable for two months.

Sept. 30, 2013
Interest receivable...........................................................
Interest revenue ($15,000 x 8% x 2/12)............................

200
200

To record discounting of note receivable.

Sept. 30, 2013
Cash (proceeds determined below)........................................
Loss on sale of note receivable (difference).......................
Interest receivable (from adjusting entry).........................
Note receivable (face amount)........................................

The McGraw-Hill Companies, Inc., 2013

7-10

14,976
224
200
15,000

Intermediate Accounting, 7/e

Problem 7-2 (concluded)

$15,000
600
15,600
(624)
$14,976

Face amount
Interest to maturity ($15,000 x 8% x 6/12)
Maturity value
Discount ($15,600 x 12% x 4/12)
Cash proceeds

Requirement 2
To accrue nine months' interest on the Misthos Co. note receivable.
Discount .........................................................................
Interest revenue ($12,000 x 10% x 9/12)..........................

Alternate Exercise and Problem Solutions

900
900

The McGraw-Hill Companies, Inc., 2013

7-11