E7-2



E7-2

(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.

1.Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180.

$ 2,325,000

Cash balance of $925,000. Only the checking account balance should be reported as cash. The certificates of deposit should be reported as a temporary investment, the cash advance to subsidiary should be reported as accounts receivable, and the utility deposit should be identified as a receivable from the gas company.

2.Checking account balance $600,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350.

$ 601,650

Cash balance is $584,650 = $600,000 - $17,000 + $300 + $1,350

Note: The Cash held in a bond sinking fund is restricted. Bonds are usually a noncurrent asset.

3.Checking account balance $590,000; postdated check from customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620.

$ 599,800

4. Checking account balance at bank $37,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800.

$ 85,000

5Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.

$ 880,900

Cash balance is $700,900 = $700,000 + $900

Cash restricted for future plant expansion of $500,000 should be reported

as a noncurrent asset. Short-term treasury bills of $180,000 should be

reported as a temporary investment. Cash advance received from customer

of $900 should also be reported as a liability; cash advance of $7,000 to

company executive should be reported as a receivable; refundable deposit

of $26,000 paid to federal government should be reported as a receivable.

E7-7

(Recording Bad Debts)

Duncan Company reports the following financial information before adjustments.

Dr. Cr.

Accounts Receivable$100,000

Allowance for Doubtful Accounts$2,000

Sales (all on credit) 900,000

Sales Returns and Allowances 50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.

DescriptionDebitCredit

(a)

Bad Debt Expense9,000

Allowance for Doutful Accounts9,000

Bad Debt Expense $8,500

Allowance for Doubtful Accounts $8,500

10%* ($900,000 – $50,000) = $8,500

(b)

Bad Debt Expense $3,000

Allowance for Doubtful Accounts $3,000

E7-18

On July 1, 2007, Agincourt Inc. made two sales.

1. It sold land having a fair market value of $700,000 in exchange for a 4-year non-interest-bearing promissory note in the face amount of $1,101,460. The land is carried on Agincourt's books at a cost of $590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% 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 12% interest.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2007. (For multiple debit/credit entries, list in order of magnitude. Round answers to 2 decimal places. Hint: Use tables in text.)

Description Debit Credit

Note Receivable 1,101,460

Land 590,000

Discount on Note Receivable 401,460

Gain on Sale 110,000

Note Receivable1,987.07

Service Revenue

Discount on Note Receivable

7/1/04 Notes Receivable $400,000.00

Discount on Notes Receivable $178,836.32

Service Revenue $221,163.68

To calculate the Discount on Notes Receivable:

PV of $400,000 due in 8 years at 12% = $400,000*0.40388

= $161,552

PV of $12,000 payable annually for 8 years at 12% = $12,000*4.96764

= $59,611.68

PV of the note and interest = $161,552 + $59,611.68 = $221,163.83

Discount = $400,000 - $221,163.68 = $178,836.32

E7-20

(Analysis of Receivables)

Presented below is information for Jones Company.

1. Beginning-of-the-year Accounts Receivable balance was $15,000.

2. Net sales (all on account) for the year were $100,000. Jones does not offer cash discounts.

3. Collections on accounts receivable during the year were $70,000.

Instructions

(a) Prepare (summary) journal entries to record the items noted above.

DescriptionDebitCredit

Account Receivable100,000

Sales 100,000

Cash70,000

Account Receivable70,000

Accounts Receivable $100,000

Sales $100,000

Cash $70,000

Accounts Receivable $70,000

(b) Compute Jones' accounts receivable turnover ratio for the year. The company does not believe it will have any bad debts. (Round answer to 2 decimal places.)

(4.44) times

Accounts Receivable Turnover = Sales / Average Receivables

Beginning Accounts Receivable = $15,000

Add: Sales $100,000

Total Receivables $115,000

Less: Cash Receipts $70,000

Ending Accounts Receivable $45,000

Accounts Receivable Turnover = [pic]

[pic]

(c) Use the turnover ratio computed in (b) to analyze Jones' liquidity. The turnover ratio last year was 6.0. Has Jones' ratio increased or declined?

(Declined)

This could be a bad indication of future liquidity, if customers continue to pay slowly. Jones may want to consider offering early payment (cash) discounts.

E7-24

(Bank Reconciliation and Adjusting Entries)

Angela Lansbury 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$ 7,000

Add: Deposits in Transit 1,540

Deduct: Outstanding checks(2,000)

Balance per books$ 6,540

Month of July Results

Per BankPer Books

Balance July 31$8,650$9,250

July deposits 5,000 5,810

July checks4,000 3,100

July note collected (not included in July deposits)1,000-

July bank service charge15-

July NSF check from a customer, returned by the bank (recorded by bank as a charge)335-

Instructions

(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. (For multiple entries, list in order of magnitude. List all amounts as positive amounts and subtract where necessary.)

Angela Lansbury Company

Bank Reconciliation

July 31

Balance per bank statement, July 31 $ 8,650

Add: Deposit Transit2,150

Deduct: Outstanding Check900

Correct cash balance, July 31$ 9,900

Balance per books, July 31$ 9,250

Add: Note Correction1,000

Less: Service Charge$ 15

NSF335

350

Corrected cash balance, July 31$ 9,900

Angela Lansbury Company

Bank Reconciliation

July 31

Balance per bank statement, July 31 $8,650

Add: Deposits in transit $2,350

Less: Outstanding checks ($1,100)

Correct cash balance, July 31 $9,900

Balance per books, July 31 $9,250

Add: Collection of note $1,000

Less: Bank service charge $ 15

Less: NSF check 335 ($350)

Corrected cash balance, July 31 $9,900

(b) Prepare the general journal entry or entries to correct the Cash account. (For multiple debit/credit entries, list in order of magnitude.)

Cash $650

Office Expenses—Bank Service Charge $15

Accounts Receivable $335

Notes Receivable $1,000

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