Chapter 7 Cash and Receivables
Chapter 7 Cash and Receivables
1. What may be included under the heading of “cash”?
2. In what accounts should the following items be classified?
(a) Coins and currency.
(b) U.S. Treasury (government) bonds.
(c) Certificate of deposit.
(d) Cash in a bank that is in receivership.
(e) NSF check (returned with bank statement).
(f) Deposit in foreign bank (exchangeability limited).
(g) Postdated checks.
(h) Cash to be used for retirement of long-term bonds.
(i) Deposits in transit.
(j) 100 shares of Dell stock (intention is to sell in one year or less).
(k) Savings and checking accounts.
(l) Petty cash.
(n) Travel advances.
3. Define a “compensating balance.” How should a compensating balance be reported?
4. Springsteen Inc. reported in a recent annual report “Restricted cash for debt redemption.” What section of the balance sheet would report this item?
5. What are the reasons that a company gives trade discounts?
Why are trade discounts not recorded in the accounts like cash discounts?
6. What are two methods of recording accounts receivable transactions when a cash discount situation is involved?
Which is more theoretically correct? Which is used in practice more of the time? Why?
7. What are the basic problems that occur in the valuation of accounts receivable?
8. What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?
9. Indicate how well the percentage-of-sales method and the aging method accomplish the objectives of the allowance method of accounting for bad debts.
10. Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
11. Explain how the accounting for bad debts can be used for earnings management.
12. Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately
30% of your client’s total sales have been made to
Bernstein Company during each of the past several years.
The amount due from Bernstein Company—none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
13. What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?
14. On January 1, 2014, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent’s zero-interest-bearing note for $1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?
15. What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes receivable? What are the considerations in imputing an appropriate interest rate?
16. What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?
17. Indicate three reasons why a company might sell its receivables to another company.
18. When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
19. Moon Hardware is planning to factor some of its receivables.
The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
20. Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable $789,000.
This balance consists of the following items:
Due from regular customers $523,000
Refund receivable on prior year’s income taxes (an established claim) 15,500
Travel advance to employees 22,000
Loan to wholly owned subsidiary 45,500
Advances to creditors for goods ordered 61,000
Accounts receivable assigned as security for loans payable 75,000
Notes receivable past due plus interest on these notes 47,000
Illustrate how these items should be shown in the balance sheet as of December 31.
21. What is the accounts receivable turnover, and what type of information does it provide?
22. You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year-end amounts to $100,000. Explain how you would use this information in evaluating Woodlawn’s liquidity.
*23. Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account.
* 24. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?
*25. What is meant by impairment of a loan? Under what circumstances should a creditor recognize an impaired loan?
BE7-1 Kraft Enterprises owns the following assets at December 31, 2014.
Cash in bank—savings account 68,000 Checking account balance 17,000
Cash on hand 9,300 Postdated checks 750
Cash refund due from IRS 31,400 Certifi cates of deposit (180-day) 90,000
What amount should be reported as cash?
BE7-2 Restin Co. uses the gross method to record sales made on credit. On June 1, 2014, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2014, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.
BE7-3 Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts.
Prepare the required journal entries for Restin Co.
BE7-4 Wilton, Inc. had net sales in 2014 of $1,400,000. At December 31, 2014, before adjusting entries, the balances in selected accounts were: Accounts Receivable $250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 2% of its net sales will prove to be uncollectible, prepare the
December 31, 2014, journal entry to record bad debt expense.
BE7-5 Use the information presented in BE7-4 for Wilton, Inc.
(a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expense.
(b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debt expense.
BE7-6 Milner Family Importers sold goods to Tung Decorators for $30,000 on November 1, 2014, accepting
Tung’s $30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.
BE7-7 Dold Acrobats lent $16,529 to Donaldson, Inc., accepting Donaldson’s 2-year, $20,000, zero-interestbearing note. The implied interest rate is 10%. Prepare Dold’s journal entries for the initial transaction, recognition of interest each year, and the collection of $20,000 at maturity.
BE7-8 On October 1, 2014, Chung, Inc. assigns $1,000,000 of its accounts receivable to Seneca National
Bank as collateral for a $750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.
BE7-9 Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a withoutrecourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood
Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.
BE7-10 Use the information in BE7-9 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.
BE7-11 Arness Woodcrafters sells $250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable.
Arness estimates the fair value of the recourse liability to be $8,000. Prepare the journal entry for
Arness to record the sale.
BE7-12 Use the information presented in BE7-11 for Arness Woodcrafters but assume that the recourse liability has a fair value of $4,000, instead of $8,000. Prepare the journal entry and discuss the effects of this change in the value of the recourse liability on Arness’s financial statements.
BE7-13 Recent financial statements of General Mills, Inc. report net sales of $12,442,000,000. Accounts receivable are $912,000,000 at the beginning of the year and $953,000,000 at the end of the year. Compute
General Mills’ accounts receivable turnover. Compute General Mills’ average collection period for accounts receivable in days.
*BE7-14 Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of $200. The fund is reimbursed when the cash in the fund is at $15. Petty cash receipts indicate funds were disbursed for office supplies $94 and miscellaneous expense $87. Prepare journal entries for the establishment of the fund and the reimbursement.
*BE7-15 Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books.
(a) Deposit in transit $5,500. (d) Outstanding checks $7,422.
(b) Bank service charges $25. (e) NSF check returned $377.
(c) Interest credited to Horton’s account $31.
*BE7-16 Use the information presented in BE7-15 for Horton Corporation. Prepare any entries necessary to make Horton’s accounting records correct and complete.
*BE7-17 Assume that Toni Braxton Company has recently fallen into financial difficulties. By reviewing all available evidence on December 31, 2014, one of Toni Braxton’s creditors, the National American Bank, determined that Toni Braxton would pay back only 65% of the principal at maturity. As a result, the bank decided that the loan was impaired. If the loss is estimated to be $225,000, what entry(ies) should National
American Bank make to record this loss?
E7-1 (Determining Cash Balance) The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2014, balance sheet. The following information is provided.
1. Commercial savings account of $600,000 and a commercial checking account balance of $900,000 are held at First National Bank of Yojimbo.
2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, $5,000,000.
3. Travel advances of $180,000 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 $1,500,000 is restricted for the retirement of long-term debt.
5. Petty cash fund of $1,000.
6. An I.O.U. from Marianne Koch, a company customer, in the amount of $190,000.
7. A bank overdraft of $110,000 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 $500,000. These CDs have a maturity of
9. Eastwood has received a check that is dated January 12, 2015, in the amount of $125,000.
10. Eastwood has agreed to maintain a cash balance of $500,000 at all times at First National Bank of
Yojimbo to ensure future credit availability.
11. Eastwood has purchased $2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.
12. Currency and coin on hand amounted to $7,700.
(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2014.
(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2014, balance sheet.
E7-2 (Determining Cash Balance) Presented below are a number of independent situations.
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 $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180.
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.
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.
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.
5. Checking 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.
E7-3 (Financial Statement Presentation of Receivables) Jim Carrie Company shows a balance of $181,140 in the Accounts Receivable account on December 31, 2013. The balance consists of the following.
Installment accounts due in 2014 $23,000
Installment accounts due after 2014 34,000
Overpayments to vendors 2,640
Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan 79,000
Advances to employees 1,500
Advance to subsidiary company (due in 2015) 81,000
Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on
December 31, 2013.
E7-4 (Determining Ending Accounts Receivable) Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of $1,500 per month, has just purchased a new Acura. You decided to test the accuracy of the accounts receivable balance of $82,000 as shown in the ledger.
The following information is available for your first year in business.
(1) Collections from customers $198,000
(2) Merchandise purchased 320,000
(3) Ending merchandise inventory 90,000
(4) Goods are marked to sell at 40% above cost
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.
E7-5 (Recording Sales Gross and Net) On June 3, Arnold Company sold to Chester Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On
June 12, the company received a check for the balance due from Chester Company.
(a) Prepare journal entries on the Arnold 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 Chester Company did not remit payment until July 29.
E7-6 (Recording Sales Transactions) Presented below is information from Perez Computers Incorporated.
July 1 Sold $20,000 of computers to Robertson Company with terms 3/15, n/60. Perez uses the gross method to record cash discounts.
10 Perez received payment from Robertson for the full amount owed from the July transactions.
17 Sold $200,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.
30 The Clark Store paid Perez for its purchase of July 17.
Prepare the necessary journal entries for Perez Computers.
E7-7 (Recording Bad Debts) Duncan Company reports the following financial information before adjustments.
Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
E7-10 (Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.
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.
E7-8 (Recording Bad Debts) At the end of 2014, Aramis Company has accounts receivable of $800,000 and an allowance for doubtful accounts of $40,000. On January 16, 2015, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.
(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.
(b) What is the net realizable value of Aramis Company’s accounts receivable before the write-off of the
(c) What is the net realizable value of Aramis Company’s accounts receivable after the write-off of the
E7-9 (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Reba
McIntyre Inc. shows the following balances.
Accounts Receivable $90,000
Allowance for Doubtful Accounts 1,750
Sales Revenue (all on credit) $680,000
Accounts Receivable $100,000
Allowance for Doubtful Accounts $ 2,000
Sales Revenue (all on credit) 900,000
Sales Returns and Allowances 50,000
Dickinson 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 Dickinson Corporation’s sales are on a 30-day credit basis. Sales for the current year total $2,200,000, and research has determined that bad debt losses approximate 2% of sales.
(a) Do you agree or disagree with Dickinson’s 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?
5 E7-11 (Bad Debts—Aging) Danica Patrick, Inc. includes the following account among its trade receivables.
Age the balance and specify any items that apparently require particular attention at year-end.
E7-12 (Journalizing Various Receivable Transactions) Presented below is information related to James
July 1 James Garfi eld Corp. sold to Warren Harding Co. merchandise having a sales price of $8,000 with terms
2/10, net/60. Garfi eld records its sales and receivables net.
5 Accounts receivable of $9,000 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a fi nancing charge of 9%. Cash is received for the proceeds; collections are handled by the fi nance company. (These accounts were all past the discount period.)
9 Specifi c accounts receivable of $9,000 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of $6,000 at a fi nance charge of 6% of the amount of the loan. The fi nance company will make the collections. (All the accounts receivable are past the discount period.)
Dec. 29 Warren Harding Co. notifi es Garfi eld that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)
Prepare all necessary entries in general journal form for Garfield Corp.
E7-13 (Assigning Accounts Receivable) On April 1, 2014, Rasheed Company assigns $400,000 of its accounts receivable to the Third National Bank as collateral for a $200,000 loan due July 1, 2014. The assignment agreement calls for Rasheed Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).
(a) Prepare the April 1, 2014, journal entry for Rasheed Company.
(b) Prepare the journal entry for Rasheed’s collection of $350,000 of the accounts receivable during the period from April 1, 2014, through June 30, 2014.
(c) On July 1, 2014, Rasheed paid Third National all that was due from the loan it secured on April 1,
2014. Prepare the journal entry to record this payment.
Date Customer Amount
March 31 E. L. Masters Company $7,800
June 30 Stephen Crane Associates 6,700
September 30 Amy Lowell’s Dress Shop 7,000
December 31 R. Frost, Inc. 9,830
1/1 Balance forward 700 1/28 Cash (#1710) 1,100
1/20 Invoice #1710 1,100 4/2 Cash (#2116) 1,350
3/14 Invoice #2116 1,350 4/10 Cash (1/1 Balance) 155
4/12 Invoice #2412 1,710 4/30 Cash (#2412) 1,000
9/5 Invoice #3614 490 9/20 Cash (#3614 and
10/17 Invoice #4912 860 part of #2412) 790
11/18 Invoice #5681 2,000 10/31 Cash (#4912) 860
12/20 Invoice #6347 800 12/1 Cash (#5681) 1,250
12/29 Cash (#6347) 800
E7-14 (Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil
Collins Company shows the following balances.
Accounts Receivable $82,000
Allowance for Doubtful Accounts 2,120
Sales Revenue $430,000
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, Collins factors without recourse $25,000 of accounts receivable with Stills
Finance. The finance charge is 10% of the amount factored.
2. To obtain a 1-year loan of $55,000, Collins assigns $65,000 of specific receivable accounts to Crosby
Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to
3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.
4. The company wishes to increase the allowance account by 1?% of net sales.
E7-15 (Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of $200,000 to Joffrey Company for $160,000 on a with recourse basis.
The recourse provision has a fair value of $1,000. This transaction should be recorded as a sale. Prepare the appropriate journal entry to record this transaction on the books of Ames Quartet Inc.
E7-16 (Transfer of Receivables with Recourse) Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2014.
Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
(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, 2014, for
Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.
E7-17 (Transfer of Receivables without Recourse) JFK Corp. factors $300,000 of accounts receivable with
LBJ Finance Corporation on a without recourse basis on July 1, 2014. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1?% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
(a) Prepare the journal entry on July 1, 2014, for JFK Corp. to record the sale of receivables without recourse.
(b) Prepare the journal entry on July 1, 2014, for LBJ Finance Corporation to record the purchase of receivables without recourse.
E7-18 (Note Transactions at Unrealistic Interest Rates) On July 1, 2014, Agincourt Inc. made two sales.
1. It sold land having a fair value of $700,000 in exchange for a 4-year zero-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.
Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2014.
E7-19 (Notes Receivable with Unrealistic Interest Rate) On December 31, 2012, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to
accept a $200,000 zero-interest-bearing note due December 31, 2014, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.
(a) Prepare the journal entry to record the transaction of December 31, 2012, for the Ed Abbey Co.
(b) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December
(c) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December
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.
(a) Prepare (summary) journal entries to record the items noted above.
(b) Compute Jones’s accounts receivable turnover for the year. The company does not believe it will have any bad debts.
(c) Use the turnover ratio computed in (b) to analyze Jones’s liquidity. The turnover ratio last year was 6.0.
E7-21 (Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling $25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is $1,200.
(a) Prepare the journal entry to record the sale of the receivables.
(b) Compute Jones’s accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.
*E 7-22 (Petty Cash) Carolyn Keene, 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 $200.
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 $60.00
Supplies purchased and used 25.00
Postage expense 33.00
I.O.U. from employees 17.00
Miscellaneous expense 36.00
The petty cash fund was replenished on April 10. The balance in the fund was $27.
3. The petty cash fund balance was increased $100 to $300 on April 20.
Prepare the journal entries to record transactions related to petty cash for the month of April.
*E 7-23 (Petty Cash) The petty cash fund of Fonzarelli’s Auto Repair Service, a sole proprietorship, contains the following.
The general ledger account Petty Cash has a balance of $300.
1. Coins and currency $ 15.20
2. Postage stamps 2.90
3. An I.O.U. from Richie Cunningham, an employee, for cash advance 40.00
4. Check payable to Fonzarelli’s Auto Repair from
Pottsie Weber, an employee, marked NSF 34.00
5. Vouchers for the following:
Stamps $ 20.00
Two Rose Bowl tickets for Nick Fonzarelli 170.00
Printer cartridge 14.35 204.35 $296.45
Prepare the journal entry to record the reimbursement of the petty cash fund.
*E 7-24 (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.
(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.
*E 7-25 (Bank Reconciliation and Adjusting Entries) Logan Bruno Company has just received the August
31, 2014, bank statement, which is summarized below.
The general ledger Cash account contained the following entries for the month of August.
Deposits in transit at August 31 are $3,800, and checks outstanding at August 31 total $1,050. Cash on hand at August 31 is $310. The bookkeeper improperly entered one check in the books at $146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.
(a) Prepare a bank reconciliation dated August 31, 2014, 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 August 31 balance sheet?
* E7-26 (Impairments) On December 31, 2014, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2016, Majoli began to experience financial difficulty. As a result, at December 31, 2016, Paris
Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2014.
(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2016, by Paris Bank.
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 Bank Per Books
Balance July 31 $8,650 $9,250
July deposits 5,000 5,810
July checks 4,000 3,100
July note collected (not included in July deposits) 1,000 —
July bank service charge 15 —
July NSF check from a customer, returned by the bank 335 —
(recorded by bank as a charge)
County National Bank Disbursements Receipts Balance
Balance, August 1 $ 9,369
Deposits during August $32,200 41,569
Note collected for depositor, including $40 interest 1,040 42,609
Checks cleared during August $34,500 8,109
Bank service charges 20 8,089
Balance, August 31 8,089
Balance, August 1 10,050 Disbursements in August 34,903
Receipts during August 35,000
* E7-27 (Impairments) On December 31, 2014, Conchita Martinez Company signed a $1,000,000 note to
Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2016, Sauk City Bank determined that it was probable that the company would pay back only $600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.
(a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2014.
(b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2016.
(c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2016.