2 problems

Problem 2-1

Analyzing Various Receivable Transactions

The December 31, 2018, statement of financial position of the Terex Company included
the following information:

Accounts receivable $ 672,000

Less: Allowance for bad debts 42,300 $ 629,700
Notes receivable * 65,400
Total receivables $ 695,100

* The company is contingently liable for discounted notes receivable of $114,000.

During the year ending December 31, 2019, the following transactions occurred:

1. Sales on credit $ 2,623,800

2. Collection of accounts receivable 2,523,000
3. Accounts receivable written off as uncollectible 41,400
4. Notes receivable collected 87,000
5. Customer note received in payment of accounts receivable 216,000
6. Notes receivable discounted that were paid at maturity 108,000
7. Notes receivable discounted that were defaulted, including interest of $60
and a $15 fee. This amount is expected to be collected during 2020 6,075
8. Proceeds from customer notes discounted with recourse (principal $135,000
accrued interest, $600) 135,225
9. Collections on accounts previously written off 1,500
10. Sales returns and allowances (on credit sales) 6,000
11. Bad debts were estimated to be 1.5% of credit sales

Required:
Based on the preceding information, determine the balances of the following accounts
at December 31, 2019.
a. Accounts receivable
b. Allowance for doubtful accounts
c. Notes receivable
d. Notes receivable discounted

1) Account Receivable 2,623,800

Sales 2,623,800
2) Cash 2,523,000
Account Receivable 2,523,000
3) Allowance for credit loss 41,400
Account Receivable 41,400
4) Cash 87,000
Notes Receivable 87,000
5) Notes Receivable 216,000
Account Receivable 216,000
6) Notes Receivable Discounted 108,000
Notes Receivable 108,000
7) Account Receivable 6,075
Cash 6,075
Notes Receivable Discounted (6,000-[60+15]) 6,000
Notes Receivable 6,000
8) Cash 135,225
Loss on discounting of notes receivable 375
Notes Receivable Discounted 135,000
 Interest Income 600
Proceeds 135,225
CV of note (135,000 + 600) 135,600
Loss on discounting 375
9) Account Receivable 1,500
Allowance for credit loss 1,500
Cash 1,500
Account Receivable 1,500
10) Sales Return and Allowances 6,000
Account Receivable 6,000
11) Expected Credit Loss (Bad Debt Expense) 39,357
Allowance for credit loss 39,357

a) Account Receivable : $ 672,000

$ 2,623,800
$ (2,523,000)
$ (41,400)
$ (216,000)
$ 6,075
$ 1,500
$ (1,500)
$ (6,000)
$ 515,475

b) Allowance for doubtful accounts : $ 42,300

$ (41,400)
$ 1,500
$ 39,357
$ 41,757

c) Notes Receivable : $ 114,000

$ 65,400
$ 216,000
$ (87,000)
$ (108,000)
$ (6,000)
$ 194,400

d) Notes Receivable Discounted : $ 114,000

$ (108,000)
$ (6,000)
$ 135,000
$ 135,000

Problem 2-2

Computation of Accounts Receivable Balance

Shown below is Golden Egg Company's aging schedule of its accounts receivable on December 31,
2019:
Days Past Due
Customers Balance Due Current 1-30 31-60 Over 60

Able Company $ 23,000 $ - $ - $ 23,000 $ -

Bubble, Company 105,000 62,000 20,000 13,000 10,000
Candy Corporation 87,500 23,000 14,500 10,000 40,000
Delta, Inc. 93,500 53,000 20,500 10,000 10,000
Eggnog Transport 40,000 0 0 0 40,000
Flower, Inc. 31,000 15,000 16,000 0 0
Glory, Company 1,000 1,000 0 0 0
Hillside Corporation 64,000 20,000 18,000 16,000 10,000
Idol Company 60,000 60,000 0 0 0
$ 505,000 $ 234,000 $ 89,000 $ 72,000 $ 110,000

The accounts receivable balance per general ledger is $505,000 on December 31, 2019.

The following are audit comments for possible adjustments:

Able Company

Merchandise found defective; returned by the customer on November 10 for credit, but the credit
memo was issued by Golden Egg Company only on January 2, 2020.

Bubble, Company

Account is good but usually pays late.

Candy Corporation

Merchandise worth of $40,000 destroyed in transit on June 4, 2019. The carrier was billed on July 1.
(see Eggnog Transport and Idol Company)

Delta, Inc.

Customer billed twice in error for $10,000. Balance is collectible.

Eggnog Transport

Collected in full on January 15, 2020.

Flower, Inc.

Paid in full on December 29, 2019, but not recorded. Collections were deposited January 3, 2020.

Glory, Company

Received account confirmation from customer for $11,000. Investigation revealed an erroneous
credit for $10,000. (see Hillside Corporation)

Hillside Corporation

Neglected to post $10,000 credit to customer's account.

Idol Company

Customer wants to know the reason for receipt of $40,000 credit memo as its accounts payable
balance is $100,000.

Required:
Based on the foregoing information, what should be the adjusted balance of the Accounts
Receivable-trade at December 31, 2019?

Accounts Receivable per general ledger $ 505,000

Able Co. - Delayed issuance of credit memo $ (23,000)
Candy Corp. - Damaged merchandise credited to Idol Company $ (40,000)
Delta inc. - Double Billing $ (10,000)
Flower Inc. - Collection not Recorded $ (31,000)
Glory Co. - Erroneous posting of credit for Hillside Corp. $ 10,000
Hillside Corp. - Payment credit in error to Glory Co. $ (10,000)
Idol Co. - Credit for Candy Corp. Erroneously posted to Idol Company $ 40,000
Adjusted Balance of accounts receivable-trade $ 441,000

Problem 2-3

Bad Debts Reporting

Presented below are unrelated situations. Answer the questions relating to each situation.

A. Lambert Company's accounts receivable at December 31, 2019 had a balance of $1,200,000.
The allowance for bad debts account had a credit balance of $40,000. Net sales in 2019
were $6,704,000 (net of sales discounts of $56,000). An aging schedule shows that
$150,000 of the outstanding accounts receivable are doubtful.
Required:
What is the adjusting entry for estimated bad debts?
Required allowance 150,000
Less: Allowance Balance 40,000
Increase in Allowance 110,000

Bad Debt Expense 110,000

Allowances for bad debts 110,000

B. The following selected transactions occurred during the year ended December 31, 2019:

Gross sales (cash and credit) $ 750,000

Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales return and
allowances 8,400
Cash refunds given to cash customers for sales returns and
allowances 12,640
Recoveries on accounts receivable written off in prior years (not
included in cash received stated above) 5,421

At year-end, the company provided for estimated bad debts losses by crediting
the Allowance for Bad Debts accounts for 2% of its net credit sales for the year.
Required:
1. What is the company's net credit sales in 2019?
Credit Sales (750,000 - 150,000) $ 600,000
Sales Discounts from credit sales (245,000/98% = 250.000 x 2%) $ (5,000)
Sales Returns from credit sales $ (8,400)
Net Credit Sales $ 586,600

2. What is the bad debt expense for 2019?

Net Credit Sales $ 586,600
x % of uncollectible 2%
Bad Debts $ 11,732

C. Cocoon Company estimates its bad debt expense to be 3% of net sales. The company's
unadjusted trial balance at December 31, 2019 included the following accounts:

Debit Credit

Allowance for bad debts $ 8,000

Sales $ 2,600,000
Sales returns and allowances $ 45,000
Required:
What is the company's bad debts expense for 2019?
 Net Sales (2,600,000 - 45,000) 2,555,000
Multiply by bad debt rate x 3%
Bad debt expense 76,650

D. Belfast Company estimates its uncollectible accounts to be 3% of the accounts receivable

balance. The following information was taken from the company's statement of financial
position at December 31, 2019.
Debit Credit

Net sales (including cash sales of $825,0000) 3,460,000

Allowance for bad debts 69,000
Accounts receivable 2,460,000
Required:
What is the bad debt expense to be reported for 2019?
Required allowance Dec 31,2019 (2,460,000 x 3%) 73,800
Add: Allowance balance before adjustment-debit 69,000
Bad debt expense 2019 142,800

Problem 2-4

Analysis of Accounts Receivable and Related Accounts

The following information is based on a first audit of Serenity Company. The client has not prepared
financial statements for 2017, 2018, 2019. During these years, no accounts have been written off as
uncollectible, and the rate of gross profit on sales has remained constant for each of the three years.

Prior to January 1, 2017, the client used the accrual method of accounting. From January 1, 2017 to
December 31, 2019, only cash receipts and disbursements records were maintained. When sales
on account were made, they were entered in the subsidiary accounts receivable ledger. No general
ledger postings have been made since December 31, 2016.

As a result of your examination, the correct data shown in the table below are available:

12/31/16 12/31/19
Accounts receivable balances:
Less than one year old $ 15,400 $ 28,200
One to two years 1,200 1,800
Two to three years old 800
Over three years old 2,200
Total accounts receivable $ 16,600 $ 33,000

Inventories $ 11,600 $ 18,800

Accounts payable for inventory purchased $ 5,000 $ 11,000

Cash received on accounts receivable in:

2017 2018 2019

Applied to:
Current year collections $ 148,800 $ 161,800 $ 208,800
Accounts of the prior year 13,400 15,000 16,800
Accounts of two years prior 600 400 2,000
Total $ 162,800 $ 177,200 $ 227,600

Cash sales $ 17,000 $ 26,000 $ 31,200

Cash disbursements for Inventory Purchased $ 125,000 $ 141,200 $ 173,800

Required:
1. What is the company's sales revenue for the three-year period?
Account Receivable, Dec. 31.2019 33,000
Add: Collections, 2017-2019 567,600 (162.800+177.200+227.800)
Total 600,600
Less: Account Receivable, Jan. 1,2017 16,600
Total Credit sales 584,000
Add: Cash Sales, 2017-2019 74,200 (17.000+26.000+31.200)
Total Sales, 2017-2019 658,200

2. What is the company's total sales revenue for 2018?

Cash Sales 26,000
Collection in:
2017 0
2018 161,800
2019 16,800
A/R, Dec 31 1,800
Total Sales 206,400

3. What is the aggregate amount of purchases for the three-year period?

Account payable, Dec. 31 2019 11,000
Add: payment to suppliers 440,000 (125.000+141.200+173.800)
Total 451,000
Less: Account Payable, Jan 1,2019 5,000
Total purchases 2017-2019 446,000

4. What is the company's gross profit ratio in each of the three-year period?
Sales $ 658,200
Less: Cost of sales
Inventory Jan 1 2017 $ 11,600
Add: Purchase $ 446,000
Goods avaible for sale $ 457,600 (446,000+11,600)
Less: Inventory Dec 31 2019 $ 18,800 $ 438,800
Gross Income $ 219,400
Gross Income Ratio (219,400/658,200) 33.333%

5. What is the company's gross profit for each of the three-year period?
2017 2018 2019 Total
Cash Sales $17,000 $26,000 $31,200 $74,200
Collection in:
2017 $148,800 $0 $0 $148,800
2018 $15,000 $161,800 $0 $176,800
2019 $2,000 $16,800 $208,800 $227,600
A/R, Dec 31 $800 $1,800 $28,200 $30,800
Total Sales $183,600 $206,400 $268,200 $658,200
Multiply by gross income ratio 33.333% 33.333% 33.333% 33.333%
Gross income $ 61,200 $ 68,800 $ 89,400 $ 219,400

Problem 2-5

Assignment and Factoring of Accounts Receivable

Presented below are unrelated situations. Answer the questions relating to each situations:

A. On December 5, 2019, Bellarus Company sold its accounts receivable (net realizable value,
$260,000) for cash of $230,000. Ten percent of the proceeds was withheld by the factor to
allow for possible customer returns and other account adjustments. The related allowance for
bad debts is $40,000.
Required:
 1. What amount of loss on factoring should be recognized?
Net realizable value of accounts receivable 260,000
Less : Cash proceeds 230,000
Loss on factoring 30,000

2. What is the entry to record the factoring of accounts receivable?

Cash (230,000x90%) 207,000
Allowance for bad debts 40,000
Loss on factoring 30,000
Receivable from factor (230,000x10%) 23,000
Account Receivable 300,000

B. On April 1, 2019, Sonata Company assigned accounts receivable totaling $400,000 as a

collateral on a $300,000, 16% note from Island Bank. The assignment was done on a
non-notification basis. In addition to the interest on the note, the bank also receives a 2%
service fee, deducted in advance on the $300,000 value of the note.

Additional information is as follows:

a. Collections of assigned accounts in April totaled $191,100 net of a 2% sales discounts.

b. On May 1, Sonata Company paid the bank the amount owed for April collections plus
accrued interest on note to May 1.
c. The remaining accounts were collected by Sonata Company during May except for $2,000
accounts written off as worthless.
d. On June 1, Sonata Company paid the bank the remaining balance on the note plus
accrued interest.
Required:
Prepare the journal entries to record the above transactions on the books of Sonata
Company.
April 1 Account Receivable-assigned 400,000
Account Receivable 400,000
1 Cash 294,000
Finance Charge (300,000x2%) 6,000
Notes Payable 300,000

1) Cash 191,100
Sales Discounts 3,900
Account Receivable-assigned (191,100/98%) 195,000
2) Notes Payable 195,000
Interest Expense (300,000x16%x1/12) 4,000
Cash 199,000
3) Cash 203,000
Allowance for bad debt 2,000
Account Receivable-assigned (400,000-195,000) 205,000
4) Notes Payable (300,000-195,000) 105,000
Interest Expense (105,000x16%x1/12) 1,400
Cash 106,400

C. Romero Finance company purchases the accounts receivable of other companies on a

without recourse, notification basis. At the time the receivable is factored, 15% of the amount
factored is charged to the client as commission and recognized as revenue in Romero Finance
Company's books. Also 10% of the receivable factored is withheld by Romero Finance as
protection against sales returns or other adjustment. This amount is credited by Romero
Finance to the Client Retainer account. At the end of each month, payments are made by
Romero Finance to its clients so that the balance in the Client Retainer account is equal to
10% of the unpaid factored receivables. Based on the company's bad debt loss experience, an
allowance for bad debts of 5% of all factored receivables is to be established. Romero Finance
Company makes adjusting entries at the end of each month.
 On January 3, 2019, Petrol Company factored its accounts receivable totaling $1,000,000.
By January 31, $800,000 on these receivables had been collected by Romero Finance.
Required:
Prepare the entries on Romero Finance Company's and Petrol Company's books to
record the above information.
Romero Finance Company's Books
Jan 3 Accounts receivable factored 1,000,000
Commission income (1,000,000x15%) 150,000
Client Retainer (1,000,000x10%) 100,000
Cash 750,000
31 Cash 800,000
Accounts receivable factored 800,000
31 Client Retainer 80,000
Cash (100,000-[10%x200,000]) 80,000
31 Bad debts expense 50,000
Allowance for bad debts (1,000,000x5%) 50,000

Petrol Company's Books

Jan 3 Cash 750,000
Receivable from factor 100,000
Commission 150,000
Account Receivable 1,000,000
31 Cash 80,000
Receivable from factor 80,000

Problem 2-6

Discounting of Notes Receivable

During your audit of Fable Company for the year ended December 31, 2019, you find the following
account:
Note Receivable
Date Debit Credit
Sept. 1. Corrie, 20%, due in 3 months $ 80,000
Oct. 1. Hazy Co., 24%, due in 2 months 300,000
Oct. 1. Discounted Corrie note at 25% $ 80,000
Nov. 1. Violet, 24%, due in 13 months 600,000
Nov. 30. Celtix Inc., no interest, due in one year 500,000
Nov. 30. Discounted Celtix note at 18% 500,000
Dec. 1. Tiktok, 18%, due in 5 months 900,000
Dec. 1. M. Reynolds, President, 12%, due in 3 months
(for cash loan given to M. Reynolds) 1,200,000

All notes are trade notes unless otherwise specified. The Corrie note was paid on December 1 as
per notification received from the bank. The Hazy Co. note was dishonored on the due date but
the legal department has assured management of its full collectability.

The company, with your concurrence, will treat the discounting as a conditional sale of note
receivable.

Required:
1. At what amount on the current assets section of the December 31, 2019, statement
of financial position will the Note Receivable-trade be carried?
Violet 600,000
Tiktok 900,000
Total Notes receivable-trade Dec 31 2019 1,500,000

2. What amount of loss/gain on notes receivable discounting should be reported in the 2019
income statement of the company?
 Principal 80,000
Interest (80,000x20%x3/12) 4,000
Maturity value 84,000
Discount (84,000x25%x2/12) 3,500 80,500
Book Value
Principal 80,000
Accured interest receivable (80,000x20%x1/12) 1,333 81,333
loss on discount of corrie note 833
Principal/maturity value 500,000
discount (500,000x18%x12) (90,000)
net proceeds 410,000
Book Value 500,000
Loss on discount of celtix note 90,000

Total loss on discounting (833+90,000) 90,833

3. Based on the ledger account presented, what amount of interest income should be
accrued at December 31, 2019?
Hazy (300,000x24%x3/12) 18,000
Violet (600,000x24%x2/12) 24,000
Tiktok (900,000x18%x1/12) 13,500
M. Reynolds (1.200,000x12%x1/12) 12,000
Total accured interest receivable Dec 31 2019 67,500