Ch.

7 Financial Assets
• P.7.1 A:The cash transactions and cash balances of Banner, Inc., for July were as
follows:
1. The ledger account for Cash showed a balance at July 31 of $125,568.
2. The July bank statement showed a closing balance of $114,828.
3. The cash received on July 31 amounted to $16,000. It was left at the bank
in the night depository chute after banking hours on July 31 and therefore
was not recorded by the bank on the July statement.
4. Also included with the July bank statement was a debit memorandum
from the bank for $ 50 representing service charges for July.
5. A credit memorandum enclosed with the July bank statement indicated
that a non-interest bearing note receivable for $4,000 from Rene Manes,
left with the bank for collection, had been collected and the proceeds
credited to the account of Banner, Inc.
6. Comparison of the paid checks returned by the bank with the entries in
the accounting records revealed that check no. 821 for $519, issued July
15 in payment for office equipment, had been erroneously entered in
Banner’s records as $915.
 Ch. 7 Financial Assets
7. Examination of the paid checks also revealed that three checks, all issued in July, had not yet
been paid by the bank: no. 811 for $314; no. 814 for $625; no. 823 for $175.

8. Included with the July bank statement was a $200 check drawn by Howard Williams, a
customer of Banner, Inc. This check was marked “NSF.” It had been included in the deposit of
July 27 but had been charged back against the company’s account on July 31.

• Instructions
a. Prepare a bank reconciliation for Banner, Inc., at July 31.
b. Prepare journal entries (in general journal form) to adjust the accounts at July 31.
Assume that the accounts have not been closed.
c. State the amount of cash that should be included in the balance sheet at July 31.
d. Explain why the balance per the company’s bank statement is often larger than the
balance shown in its accounting records.
 Ch. 7 Financial Assets
• Solution: (a)
Banner Inc.
Bank Reconciliation Statement
July 31, 2019
Cash balance as per bank’s statement $ 114,828
Add: Deposit in transit 16,000
$ 130,828

Less: Outstanding checks

Ch. 811 $ 314
Ch. 814 625
Ch. 823 175 1,114
Adjusted Cash balance $ 129,714
 Ch. 7 Financial Assets
Cash balance as per accounting record $ 125,568
Add: Note Rec. (R. Manes) $ 4,000
Office Equipment 396 4,396
$ 129,964

Less: Service Charges $ 50

NSF ( H. Williams) 200 250
Adjusted Cash balance $ 129,714

(Working: 915 – 519 = 396)

• (b)

31/7 : Cash 4,396

Notes Rec. 4,000
Office Equipment 396
 Ch. 7 Financial Assets
31/7: Bank Services Charges 50
Accounts Receivable (H. Williams) 200
Cash 250

• (c) The amount of cash that should be included in the balance sheet at
July 31 is the adjusted balance of $129,714.

• (d) The balance per the company’s bank statement is :

 There are checks outstanding which have been deducted in the

company’s records but which have not yet been cleared by the bank.

 The bank periodically makes collections and deposits them into the
company’s account.

 Interest accrued on the balance outstanding.

 Ch. 7 Financial Assets
• P. 7.3 A: Super Star, a Hollywood publicity firm, uses the balance sheet approach to
estimate uncollectible accounts expense. At year-end, an aging of the
accounts receivable produced the following five groupings:

a. Not yet due $ 500,000

b. 1–30 days past due 210,000
c. 31–60 days past due 80,000
d. 61–90 days past due 15,000
e. Over 90 days past due 30,000
Total $ 835,000

• On the basis of past experience, the company estimated the percentages probably
uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group
b, 3 percent; Group c, 10 percent; Group d, 20 percent; and Group e, 50 percent.

• The Allowance for Doubtful Accounts before adjustment at December 31 showed a

credit balance of $ 11,800.
 Ch. 7 Financial Assets
Instructions
a. Compute the estimated amount of uncollectible accounts based on the above
classification by age groups.
b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to
the proper amount.
c. Assume that on January 10 of the following year, Super Star learned that an account
receivable that had originated on September 1 in the amount of $ 8,250 was worthless
because of the bankruptcy of the client, April Showers. Prepare the journal entry
required on January 10 to write off this account.
d. The firm is considering the adoption of a policy whereby clients whose outstanding
accounts become more than 60 days past due will be required to sign an interest-
bearing note for the full amount of their outstanding balance. What advantages would
such a policy offer?
 Ch. 7 Financial Assets
• Solution: (a) Accounts Receivable by age groups:
Categories Amount %age considered Est. Uncollectible
uncollectible Accounts
Not yet due $ 500,000 1 $ 5,000
1-30 days 210,000 3 6,300
31-60 days 80,000 10 8,000
61-90 days 15,000 20 3,000
Over 90 days 30,000 50 15,000
Totals $ 835,000 $ 37,300

(Working: 500,000*1% = 5,000; 210,000*3% = 6,300; 80,000*10% = 8,000;

15,000*20% = 3,000; 30,000*50% = 15,000)
 Ch. 7 Financial Assets
• (b) 31/12: Uncollectible Accts. Exp. 25,500
Allowance for doubtful Account 25,500

(Working: 37,300 - 11,800 = 25,500)

• (c) 10/1: Allowance for doubtful Accts. 8,250

A/Rec. (April Showers) 8,250

• (d) Such a policy would compensate the company for having to wait
extended periods of time to collect its cash. It also helps the company
with additional leverage or support in a court of law.
 Ch. 7 Financial Assets
• P. 7.5 A: At December 31, 2010, Weston Manufacturing Co. owned the
following investments in capital stock of publicly traded companies (classified
as available-for-sale securities):
Cost Current Market Value
• Footlocker, Inc. (5,000 shares: cost,
$17 per share; market value, $20) $ 85,000 $100,000
• The Gap, Inc. (4,000 shares: cost, $17
per share; market value, $15) 68,000 60,000
$153,000 $ 160,000

In 2011, Weston engaged in the following two transactions:

• Apr. 10: Sold 1,000 shares of its investment in Footlocker, Inc., at a price of
$21 per share, less a brokerage commission of $50.
 Ch. 7 Financial Assets
• Aug. 7: Sold 2,000 shares of its investment in The Gap, Inc., at a price of $14 per share, less a
brokerage commission of $60.
• At December 31, 2011, the market values of these stocks were: Footlocker, Inc., $18 per
share; and The Gap, Inc., $16 per share.

• Instructions
a. Illustrate the presentation of marketable securities and the unrealized holding gain
or loss in Weston’s balance sheet at December 31, 2010. Include a caption indicating
the section of the balance sheet in which each of these accounts appears.

b. Prepare journal entries to record the transactions on April 10 and August 7.

c. Prior to making a fair value adjustment at the end of 2011, determine the
unadjusted balance in the Marketable Securities control account and the Unrealized
Holding Gain (or Loss) on Investments account. (Assume that no unrealized gains or
losses have been recognized since last year.)

d. Prepare a schedule showing the cost and the market values of securities owned at
the end of 2011. (Use the same format as the schedule illustrated above.)
 Ch. 7 Financial Assets
e. Prepare the fair value adjusting entry required at December 31, 2011.

f. Illustrate the presentation of the marketable securities and unrealized

holding gain (or loss) in the balance sheet at December 31, 2011. (Follow
the same format as in part a. )

g. Illustrate the presentation of the net realized gains (or losses) in the 2011
income statement. Assume a multiple-step income statement and show
the caption identifying the section in which this amount would appear.

h. Explain how both the realized and the unrealized gains and losses will
affect the company’s 2011 income tax return.
 Ch. 7 Financial Assets
• Solution: (a) Current Assets:
Marketable Sec.(cost $ 153,000) $ 160,000

Stockholders’ Equity:
Unrealized Holding gain/loss on Investments $ 7,000

• (b) 10/4: Cash $ 20,950

Marketable Sec. 17,000
Gain on sale of Investment 3,950

(Working: 1,000*21= 21,000 – 50 = 20,950)

(Working: 1,000*17 = 17,000)
(Working: 20,950 – 17,000 = 3,950)
 Ch. 7 Financial Assets
7/8: Cash $ 27,940
Loss on sale of Investments 6,060
Marketable Securities 34,000

(Working: 2,000 * 14 = 28,000 – 60 = 27,940)

(Working: 2,000 * 17 = 34,000)
(Working: 27,940 – 34,000 = - 6,060)

• (c) Marketable Securities Account:

Balance at Dec. 31, 2010: $ 160,000
Less: Sale of securities on Apr. 10 17,000
Sale of securities on Aug. 07 34,000 51,000
Balance at Dec. 31, 2011: $ 109,000

Unrealized Holding Gain on Investments:

Balance at Dec. 31, 2010: $ 7,000
No change during the year, so the balance at Dec. 31, 2011 remains same
as on Dec. 31, 2010.
 Ch. 7 Financial Assets
• (d) Cost Current Market Value
 Footlocker, Inc. (4,000 shares: cost,
$17 per share; market value, $ 18) $ 68,000 $72,000
 The Gap, Inc. (2,000 shares: cost, $ 17
per share; market value, $ 16) 34,000 32,000
Totals $ 102,000 $ 104,000

(Working: 4,000 * 17 = 68,000; 4,000 * 18 = 72,000)

(Working: 2,000 * 17 = 34,000; 2,000 * 16 = 32,000)

• (e) Unrealized Holding gain/loss on Investment 5,000

Marketable Securities 5,000

(Working: 109,000 - 104,000 = 5,000)

 Ch. 7 Financial Assets
• (f) Current Assets:
Marketable Sec.(cost $ 153,000) $ 104,000

(Working: 109,000 – 5,000 = 104,000)

Stockholders’ Equity:
Unrealized Holding gain/loss on Investments $ 2,000

(Working: 7,000 - 5,000 = 2,000)

• (g) Non- operating items:

Loss on sale of investments $ 2,110

(Working: 3,950 – 6,060 = - 2,110)

• (h) Unrealized gains and losses are not reported in a company’s income tax return. The
realized loss on the sale of marketable securities will reduce both taxable income and
the company's income tax liability.
 Ch. 7 Financial Assets
P. 7.6 A: Southern Supply sells a variety of merchandise to retail stores on account, but it insists
that any customer who fails to pay an invoice when due must replace their account
receivable with an interest-bearing note. The company adjusts and closes its accounts at
December 31. Among the transactions relating to notes receivable were the following:

• Nov. 1 Received from a customer (LCC) a nine-month, 12 percent note for $60,000 in
settlement of an account receivable due today.

• Aug. 1 Collected in full the nine-month, 12 percent note receivable from LCC, including
interest.

• Instructions
a. Prepare journal entries (in general journal form) to record:

(1) the receipt of the note on November 1;

(2) the adjustment for interest on December 31; and
(3) the collection of principal and interest on August 1. (To better illustrate the
allocation of interest revenue between accounting periods, we will assume
Southern Supply makes adjusting entries only at year-end. )
 Ch. 7 Financial Assets
b. Assume that instead of paying the note on August 1, the customer (LCC)
had defaulted. Give the journal entry by Southern Supply to record the
default. Assume that LCC has sufficient resources that the note eventually
will be collected.

c. Explain why the company insists that any customer who fails to pay an
invoice when due must replace it with an interest-bearing note.
 Ch. 7 Financial Assets
• Solution: (a) 1. 1/11: Notes Receivable 60,000
Accounts Receivable (LCC) 60,000

2. 31/12: Interest Receivable 1,200

Interest Revenue 1,200

(Working: Interest = P*R*T = 60,000 * .12 * 2 = 1,200)

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3. 1/8: Cash 65,400
Notes Receivable 60,000
Interest Receivable 1,200
Interest Revenue 4,200

(Working: Interest = P*R*T = 60,000 * .12 * 7 = 4,200)

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 Ch. 7 Financial Assets
• (b) 1/8: Accounts Receivable (LCC) 65,400
Notes Receivable 60,000
Interest Receivable 1,200
Interest Revenue 4,200

(Working: Interest = P*R*T = 60,000 * .12 * 7 = 4,200)

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• (c) There are two reasons:
 The interest earned on the note compensates the company for delaying
the collection of cash beyond the due date.
 Written contracts always are preferred over verbal agreements in the
court of law.