1 - Tech
Group Work – Chapter 7
1. Assume McGregor Inc. has the following account balances at December 31, 2018 – before adjusting entries:
[pic]
Refer to the information above for McGregor
a. If McGregor uses the Balance Sheet Approach and estimates its bad debt for the year to be 6% of the Accounts Receivable balance, prepare the adjusting journal entry as of December 31, 2018.
[pic] [54,000 * .06 = 3,240]
DR CR
Bad Debt Expense 3,740
Allowance For Doubtful Accounts 3,740
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31, 2018 Balance Sheet after the adjusting entry is posted?
Accounts Receivable 54,000
Allowance for Doubtful Accounts (3,240)
Net Realizable Value of AR 50,760
c. Assume, on January 8, 2019, JD Rhimes Inc. contacts McGregor Inc and says they have declared bankruptcy and will not be able to pay their Accounts Receivable debt of $2,000. Prepare the journal entry to write-off this customer’s account.
DR CR
Allowance For Doubtful Accounts 2,000
Accounts Receivable 2,000
d. What is the Net Realizable Value of Accounts Receivable on January 8, 2019 after the customer write off? [Assume no other activity has affected those accounts since December 31, 2018.]
Accounts Receivable 52,000
Allowance for Doubtful Accounts (1,240)
Net Realizable Value of AR 50,760
e. Does the write off affect the Net Realizable Value of Accounts Receivable? No
f. Does the write off affect Net Income? No
2. Assume instead, McGregor Inc. has the following account balances at December 31, 2018 – before adjusting entries:
[pic]
Refer to the information above for McGregor
a. If McGregor uses the Income Statement Approach instead of the Balance Sheet approach and estimates it bad debt for the year to be 1% of Net Credit Sales, prepare the adjusting journal entry as of December 31, 2018.
[pic]
DR CR
Bad Debt Expense 4,530
Allowance For Doubtful Accounts 4,530
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31, 2018 Balance Sheet after the adjusting entry is posted?
Accounts Receivable 33,000
Allowance for Doubtful Accounts (4,930)
Net Realizable Value of AR 28,070
c. Assume, on January 8, 2019, JD Rhimes Inc. contacts McGregor Inc and says they have declared bankruptcy and will not be able to pay their Accounts Receivable debt of $800. Prepare the journal entry to write-off this customer’s account.
DR CR
Allowance For Doubtful Accounts 800
Accounts Receivable 800
d. What is the Net Realizable Value of Accounts Receivable on January 8, 2019 after the customer write off? [Assume no other activity has affected those accounts since December 31, 2018.]
Accounts Receivable 32,200
Allowance for Doubtful Accounts (4,130)
Net Realizable Value of AR 28,070
e. On April 19th, 2019 B&B Inc. paid McGregor Inc. $500 on an account that was previously written-off. Prepare the journal entry to reverse the previously recorded write-off and accept the cash payment.
DR CR
Reverse Write-Off - Accounts Receivable 500
Allowance for Doubtful Accounts 500
Accept Customer Payment - Cash 500
Accounts Receivable 500
3. XYZ Inc. had a January 1, 2018 [Beginning Credit Balance] in Allowance for Doubtful Accounts of $16,000. For the year 2018, XYZ Inc. reported $74,400 of Bad Debt Expense on the Income Statement. If the December 31, 2018 [Ending Credit Balance] in Allowance for Doubtful Accounts is $12,900, how much did XYZ write off as uncollectible for the year 2018?
[pic]
4. a. On August 1, 2018, McGregor Inc. loaned $90,000 to a key financial officer. The loan is due in 8 months, and it has a 7% rate. The principal and interest are due at maturity. Prepare a journal entry necessary to recognize the loan on August 1.
DR CR
Note Receivable $90,000
Cash $90,000
b. December 31, 2018 is the fiscal year-end for McGregor Inc., and they record adjusting journal entries on this date before preparation of financial statement. Prepare an adjusting entry necessary for the loan at year-end.
DR CR
Interest Receivable $2,625
Interest Revenue $2,625
($90,000 * .07 * 5/12 = $2,625)
c. On April 1, 2019, McGregor received both the Principal and Interest due on the Note. Prepare a journal entry to record this transaction.
DR CR
Cash $94,200
Interest Receivable $ 2,625
Note Receivable $90,000
Interest Revenue $ 1,575
($90,000 * .07 * 3/12 = $1,575)
5. a. On November 1, 2018, McGregor sold $900,000 worth of Accounts Receivables to Foster Factors Inc. for quick cash flow. Foster Factors Inc. will charge a 4% Finance Fee and retain an additional 6% to be remitted at a later date. The selling of these receivables is on a Without Recourse basis. Prepare journal entries for both McGregor and Foster Factors on November 1, 2018 to recognize this transaction.
McGregor
DR CR
Cash $810,000
Loss on Sale $ 36,000
Due From Factor $ 54,000
Accounts Receivable $900,000
($900,000 * .04 = $ 36,000)
($900,000 * .06 = $ 54,000)
Foster Factors
Accounts Receivable $900,000
Financing Revenue $ 36,000
Due to McGregor $ 54,000
Cash $810,000
b. Assume McGregor sold the Accounts Receivable to Foster Factors Inc. on a With Recourse basis. Both parties agree that a fair estimate of the Recourse Liability is $5,000. Prepare the journal entries for both McGregor and Foster Factors on November 1, 2018 to recognize this transaction.
McGregor
DR CR
Cash $810,000
Loss on Sale $ 41,000
Due From Factor $ 54,000
Accounts Receivable $900,000
Recourse Liability $ 5,000
($900,000 * .04 = $ 36,000) + $5,000 = $41,000
($900,000 * .06 = $ 54,000)
Foster Factors
Accounts Receivable $900,000
Financing Revenue $ 36,000
Due to McGregor $ 54,000
Cash $810,000
6. On January 1, 2018, ABC Co. sold land at cost worth $63,506 in exchange for a 3-year, $80,000 non-interest bearing Note Receivable. The current implied interest rate for notes of this type is 8%.
a. Prepare ABC Co.’s journal entry at January 1, 2018 to recognize this transaction.
Notes Receivable 80,000
Land 63,506
Discount on Note Receivable 16,494
b. Assume ABC Co. uses the effective interest method to allocate the Note Discount to interest revenue. Prepare the necessary adjusting entry after the first year of the Note on December 31, 2018.
Discount on Note Receivable 5,081
Interest Revenue 5,081
($63,506 * .08 = $5,081)
c. At December 31, 2019 [end of second year], prepare the adjusting journal entry necessary for the Note Receivable.
Discount on Note Receivable 5,487
Interest Revenue 5,487
($68,587 * .08 = $5,487)
d. At December 31, 2020 [date of maturity], prepare the adjusting journal entry [or entries] for the Note Receivable.
Discount on Note Receivable 5,926
Interest Revenue 5,926
($74,074 * .08 = $5,926)
Cash 80,000
Notes Receivable 80,000
-----------------------
Debit
Credit
Accounts Receivable
54,000
Allowance for Doubtful Accounts
500
Sales Revenue
625,000
Sales Returns and Allowances
20,000
Sales Discounts
5,000
Trial Balance [Partial]
Debit
Credit
Accounts Receivable
33,000
Allowance for Doubtful Accounts
400
Sales Revenue
472,000
Sales Returns and Allowances
16,000
Sales Discounts
3,000
Trial Balance [Partial]
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