E7-1 (LO1) Determining Cash Balance

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be
reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account held at First National Bank of Yojimbo $ 600,000

Commercial checking account balance held at First National Bank of

Yojimbo 900,000

2. Money market fund account held at Volonte Co. (a mutual fund 5,000,000
organization) permits Eastwood to write checks on this balance

3. Travel advances for executive travel for the first quarter of next year 180,000
(employee to reimburse through salary reduction)

4. A separate cash fund restricted for the retirement of long-term debt 1,500,000

5. Petty cash fund 1,000

6. An I.O.U. from Marianne Koch, a company customer 190,000

7. A bank overdraft at one of the banks the company uses to deposit its 110,000
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. 500,000
These CDs have a maturity of 120 days

9. Eastwood received a check that is dated January 12, 2015 125,000

10. Eastwood has agreed to maintain a cash balance of $500,000 at all times 500,000
at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased commercial paper of Sergio Leone Co. which is 2,100,000
due in 60 days.

12. Currency and coin on hand 7,700

Instructions
(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December
31, 2017.

Cash includes the following:

(b) Indicate the proper reporting for items that are not reported as cash on the December 31,
2017, balance sheet.
Solution: E7-1 (LO1) Determining Cash Balance
The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be
reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account held at First National Bank of Yojimbo $ 600,000

Commercial checking account balance held at First National Bank of

Yojimbo 900,000
2. Money market fund account held at Volonte Co. (a mutual fund 5,000,000
organization) permits Eastwood to write checks on this balance
3. Travel advances for executive travel for the first quarter of next year 180,000
(employee to reimburse through salary reduction)
4. A separate cash fund restricted for the retirement of long-term debt 1,500,000

5. Petty cash fund 1,000

6. An I.O.U. from Marianne Koch, a company customer 190,000

7. A bank overdraft at one of the banks the company uses to deposit its 110,000
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. 500,000
These CDs have a maturity of 120 days

9. Eastwood received a check that is dated January 12, 2015 125,000

10. Eastwood has agreed to maintain a cash balance of $500,000 at all 500,000
times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased commercial paper of Sergio Leone Co. which 2,100,000
is due in 60 days.
12. Currency and coin on hand 7,700

Instructions
(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December
31, 2017.

Cash includes the following:

1. Commercial savings account - First National Bank of Yojimbo $ 600,000
1. Commercial checking account - First National Bank of Yojimbo 900,000
2. Money market fund—Volonte 5,000,000
5. Petty cash 1,000
11. Commercial paper (cash equivalent) 2,100,000
12. Currency and coin on hand 7,700
Cash reported on December 31, 2017, balance sheet $ 8,608,700
(b) Indicate the proper reporting for items that are not reported as cash on the December 31,
2017, balance sheet.

3. Travel advances (reimbursed by employee)* should be reported as receivable —

employee in the amount of $180,000.

4. Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should
be reported as a noncurrent asset identified as “Cash restricted for retirement of long-
term debt. If not reimbursed, charge to prepaid expense.

6. An IOU from Marianne Koch should be reported as an account receivable in the amount
of $190,000.

7. The bank overdraft of $110,000 should be reported as a current liability. If cash is

present in another account in the same bank on which the overdraft occurred, offsetting
is required.

8. Certificates of deposits of $500,000 each should be classified as temporary

investments.

9. Postdated check of $125,000 should be reported as an accounts receivable.

10. The compensating balance requirement does not affect the balance in cash. A note
disclosure indicating the arrangement and the amounts involved should be described in
the notes.
E7-5 (L02) Recording Sales Gross and Net
During June, the following transactions were incurred by Arnold Company:

On June 3, Arnold Company sold to Chester Company merchandise for $3,000

with terms of 2/10, n/60, f.o.b. shipping point. $ 3,000
An invoice, terms n/30, was received by Chester on June 8 from John Booth 90
Transport Service for the freight cost.

On June 12, the company received a check for the balance due from Chester
Company.

Instructions
(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.

Date Accounts Debit Credit

1.

2.

(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit
payment until July 29.
Solution: E7-5 (L02) Recording Sales Gross and Net
During June, the following transactions were incurred by Arnold Company:

On June 3, Arnold Company sold to Chester Company merchandise for $3,000

with terms of 2/10, n/60, f.o.b. shipping point. $ 3,000

An invoice, terms n/30, was received by Chester on June 8 from John Booth 90
Transport Service for the freight cost.
On June 12, the company received a check for the balance due from Chester
Company.

Instructions
(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.

Date Accounts Debit Credit

1. June 3 Accounts Receivable—Chester 3,000
Sales Revenue 3,000

June 12 Cash 2,940

Sales Discounts 60
Accounts Receivable—Chester 3,000

2. June 3 Accounts Receivable—Chester 2,940

Sales Revenue 2,940

June 12 Cash 2,940

Accounts Receivable—Chester 2,940

(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit
payment until July 29.

July 29 Cash 3,000

Accounts Receivable—Chester 2,940
Sales Discounts Forfeited 60
P7-1 (L01) Determine Proper Cash Balance
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its
cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash
receipts and disbursements for the first 10 days of January were recorded as December transactions.
The information is given below.

1. January cash receipts recorded in the December cash book consisting of:
Cash sales
Collections on account, for which $360 of cash discounts were given

2. January cash disbursements recorded in the December check register liquidated

accounts
Discounts taken
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December
31, 2017.

The company uses the periodic method of inventory.

Instructions
(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.

Date Accounts Debit

Dec. 31

Dec. 31
(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at
December 31 by holding its cash book open? (Compute working capital and the current ratio.)
Assume that the balance sheet that was prepared by the company showed the following
amounts:

Debit
Cash $ 39,000
Accounts receivable 42,000
Inventory 67,000
Accounts payable
Other current liabilities

Per Balance
Sheet
he end of 2017 it held its
for credit purposes. Cash
as December transactions.

$ 28,000
17,640
$ 45,640

$ 22,450

250

nts at December 31.

Credit
able balance sheet at
al and the current ratio.)
owed the following

Credit

$ 45,000
14,200

After
Adjustment
Solution: P7-1 (L01) Determine Proper Cash Balance
Francis Equipment Co. closes its books regularly on December 31, but at the end of 2017 it held its
cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash
receipts and disbursements for the first 10 days of January were recorded as December
transactions. The information is given below.

1. January cash receipts recorded in the December cash book consisted of:
Cash sales
Collections on account, for which $360 of cash discounts were given

2. January cash disbursements recorded in the December check register liquidated

accounts payable of $22,450 on which discounts were taken
Discounts taken
3. The ledger has not been closed for 2017.
4. The amount shown as inventory was determined by physical count on December
31, 2017.

The company uses the periodic method of inventory.

Instructions
(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.

Date Accounts Debit

Dec. 31 Accounts Receivable 18,000
Sales Revenue 28,000
Cash
Sales Discounts

Dec. 31 Cash 22,200

Purchase Discounts 250
Accounts Payable

(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at
December 31 by holding its cash book open? (Compute working capital and the current ratio.)
Assume that the balance sheet that was prepared by the company showed the following
amounts:
Debit
Cash $ 39,000
Accounts receivable 42,000
Inventory 67,000
Accounts payable
Other current liabilities

Per Balance
Sheet
Current assets
Cash $ 39,000
Accounts Receivable 42,000
Inventory 67,000
Total current assets 148,000

Current liabilities
Accounts payable 45,000
Other current liabilities 14,200
Total (2) 59,200
Working capital $ 88,800

Current ratio 2.50 to 1

the end of 2017 it held its
d for credit purposes. Cash
as December

$ 28,000
17,640
$ 45,640

$ 22,450

250

unts at December 31.

Credit

45,640
360

22,450

rable balance sheet at

al and the current ratio.)
owed the following

Credit

$ 45,000
14,200

After
Adjustment
$ 15,560
60,000
67,000
142,560

67,450
14,200
81,650
$ 60,910

1.75 to 1
P7-3 (L03) Bad-Debt Reporting—Aging (CMA Adapted)
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-
end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and
Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance
reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging
schedule shown below.

Probability of
Days Account Outstanding Amount Collection
Less than 16 days $ 300,000 0.98
Between 16 and 30 days 100,000 0.90
Between 31 and 45 days 80,000 0.85
Between 46 and 60 days 40,000 0.80
Between 61 and 75 days 20,000 0.55
Over 75 days 15,000 0

Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

Expected
Percentage Estimated
Days Account Outstanding Amount Uncollectible Uncollectible

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
Solution: P7-3 (L03) Bad-Debt Reporting—Aging (CMA Adapted)
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-
end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and
Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance
reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging
schedule shown below.

Probability of
Days Account Outstanding Amount Collection
Less than 16 days $ 300,000 0.98
Between 16 and 30 days 100,000 0.90
Between 31 and 45 days 80,000 0.85
Between 46 and 60 days 40,000 0.80
Between 61 and 75 days 20,000 0.55
Over 75 days 15,000 0

Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

Expected
Percentage Estimated
Days Account Outstanding Amount Uncollectible Uncollectible
0–15 days $ 300,000 0.02 $ 6,000
16–30 days 100,000 0.10 10,000
31–45 days 80,000 0.15 12,000
46–60 days 40,000 0.20 8,000
61–75 days 20,000 0.45 9,000
Balance for Allowance for Doubtful Accounts $ 45,000

(b) Show how accounts receivable would be presented on the balance sheet.

Accounts receivable $ 540,000

Less: Allowance for doubtful accounts (45,000)
Accounts receivable (net) $ 495,000

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

The year-end bad debt adjustment would decrease before-tax income $20,000 as
computed below:

Estimated amount required in the Allowance for Doubtful Accounts $ 45,000

Balance in the account after write-off of uncollectible accounts but before
adjustment 25,000
Required charge to expense $20,000