Chapter 7: Exercises

Exercise 7-1: Accounts Receivable Subsidiary Ledger; Schedule of Accounts Receivable 1. Open General Ledger: Set up T-accounts for Accounts Receivable, Sales, and Sales Returns and Allowances. Also, open T-accounts in a subsidiary ledger for each customer. 2. Post Entries: Post each transaction to both the general ledger and the subsidiary ledger for the individual customers. 3. Prepare Schedule of Accounts Receivable: Summarize the subsidiary ledger to prepare a schedule of accounts receivable, then confirm it matches the ending balance of Accounts Receivable in the general ledger ($9,301). Exercise 7-2: Accounting for Credit Card Sales 1. Journal Entry for Suntrust Bank Card Sale: o Debit Cash: $8,064 (net of 4% fee on $8,400) o Debit Credit Card Expense: $336 o Credit Sales: $8,400 o Debit Cost of Goods Sold: $6,000 o Credit Merchandise Inventory: $6,000 2. Journal Entry for Continental Card Sale: o Debit Cash: $5,460 (net of 2.5% fee on $5,600) o Debit Credit Card Expense: $140 o Credit Sales: $5,600 o Debit Cost of Goods Sold: $3,500 o Credit Merchandise Inventory: $3,500 Exercise 7-3: Computing Cash Collections • • Cash Collections = Beginning Balance + Credit Sales - Ending Balance Solution: $4,000 + $20,000 - $5,000 = $19,000 Exercise 7-4: Direct Write-Off Method 1. Write-Off of Leer Co. Account: o Debit Bad Debts Expense: $45,000 o Credit Accounts Receivable - Leer Co.: $45,000 2. Recovery of Leer Co. Account: o Reverse Write-Off:  Debit Accounts Receivable - Leer Co.: $45,000 Credit Bad Debts Expense: $45,000 Record Cash Collection:  Debit Cash: $45,000  Credit Accounts Receivable - Leer Co.: $45,000  o Exercise 7-5: Writing Off Receivables 1. Write-Off of Oakley and Brookes Accounts: o Debit Allowance for Doubtful Accounts: $6,800 o Credit Accounts Receivable - Oakley Co.: $900 o Credit Accounts Receivable - Brookes Co.: $5,900 2. Reinstatement and Collection of Oakley Payment: o Reinstate Account:  Debit Accounts Receivable - Oakley Co.: $900  Credit Allowance for Doubtful Accounts: $900 o Record Cash Collection:  Debit Cash: $900  Credit Accounts Receivable - Oakley Co.: $900 Exercise 7-6: Recording and Reporting Allowance for Doubtful Accounts 1. Year-End Adjusting Entry for Bad Debts: o Debit Bad Debts Expense: $1,500 o Credit Allowance for Doubtful Accounts: $1,500 2. Prepare Current Assets Section of Balance Sheet: o Current Assets:  Cash: $14,000  Accounts Receivable: $10,000 - $1,500 = $8,500 (Net)  Inventory: $22,000  Prepaid Rent: $3,000 o Total Current Assets: $47,500 Exercise 7-7: Determining Bad Debts Expense Using Financial Disclosures • Since there were write-offs of $200 with no recoveries, bad debts expense equals the amount required to bring Allowance for Doubtful Accounts to the desired balance. Exercise 7-8: Financial Statement Impact of Receivables Transactions 1. Provide Services on Credit: o Increase Assets (Accounts Receivable): +$20,000 o Increase Equity (Service Revenue): +$20,000 2. Estimate $800 Uncollectible: o Decrease Equity (Bad Debts Expense): -$800 o Increase Contra-Asset (Allowance for Doubtful Accounts): +$800 3. Write Off $300 Account: o Decrease Accounts Receivable: -$300 o Decrease Allowance for Doubtful Accounts: -$300 Exercise 7-9: Comparing Direct Write-Off and Allowance Method Entries 1. Direct Write-Off: o Debit Bad Debts Expense: $2,000 o Credit Accounts Receivable - Joey Co.: $2,000 2. Allowance Method: o Debit Allowance for Doubtful Accounts: $2,000 o Credit Accounts Receivable - Joey Co.: $2,000 3. Recovery of Bad Debt (both methods): o Reverse Write-Off (if applicable) and Record Cash Collection. Exercise 7-10: Percent of Sales Method; Write-Off 1. December 31: o Debit Bad Debts Expense: $487,500 × 1% = $4,875 o Credit Allowance for Doubtful Accounts: $4,875 2. February 1 Write-Off of P. Park: o Debit Allowance for Doubtful Accounts: $580 o Credit Accounts Receivable - P. Park: $580 3. June 5 Recovery: o Reinstate Account and Record Collection. Exercise 7-11: Financial Statement Impact of Bad Debts Expense and WriteOffs • • December 31: Increases Bad Debts Expense, which decreases Equity. February 1: Write-off reduces Accounts Receivable and Allowance for Doubtful Accounts but has no net impact on Assets or Equity. • June 5: Recovery increases Cash and Equity via Bad Debts Recovery. Exercise 7-12: Percent of Sales Method 1. Adjustment for Bad Debts: o Debit Bad Debts Expense: $140,000 × 1% = $1,400 o Credit Allowance for Doubtful Accounts: $1,400 Exercise 7-13: Percent of Accounts Receivable Method 1. Adjustment Based on Credit Balance: o Desired Allowance = $55,000 × 2% = $1,100 o Adjustment Needed = $1,100 - $415 = $685 o Journal Entry:  Debit Bad Debts Expense: $685  Credit Allowance for Doubtful Accounts: $685 2. Adjustment Based on Debit Balance: o Adjustment Needed = $1,100 + $291 = $1,391 o Journal Entry:  Debit Bad Debts Expense: $1,391  Credit Allowance for Doubtful Accounts: $1,391