Chapter 7

Suggested Practice Problems

BE 7.7 BE 7.12 BE 7.15 BE 7.16 BE 7.17 BE 7.18 BE 7.19 E 7.7 E 7.11 E 7.14 E 7.19
E 7.20 P 7.5 P 7.6

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SOLUTIONS

BRIEF EXERCISE 7.7

Bad Debt Expense1............................................................. 37,400
Allowance for Doubtful Accounts ......................... 37,400
1
($42,000 – $4,600)

BRIEF EXERCISE 7.12

a. Notes Receivable ..................................................................... 3,861

Accumulated Depreciation – Equipment
($15,000 – $2,500) ......................................................... 12,500
Equipment ...................................................................... 15,000
Gain on Disposal of Equipment ..................................... 1,361

* Present value of the note:

$5,000 X PVF3, 9% = $5,000 X .77218 = $3,861
Discount on Note Receivable = $5,000 - $3,861 = $1,139

Fair Value of Equipment (present value of note) $3,861

Carrying Amount 2,500
Gain on Disposal of Equipment $1,361

b. Since Aitocs follows IFRS, the effective interest method is required for recognizing interest
income.

1
 Notes Receivable ..................................................................... 347
Interest Income1 ............................................................. 347
1
($3,861 X 9%)
To record interest income in the first year

Notes Receivable ..................................................................... 379

Interest Income2 ............................................................. 379
2
([$3,861 + $347] X 9%)
To record interest income in the second year
Notes Receivable ............................................................... 413
Interest Income3 ............................................................. 413
3
([$3,861 + $347 + $379] X 9%)
To record interest income in the third year

c. Collection of Note at Maturity:

Cash ............................................................................. 5,000
Notes Receivable ........................................................... 5,000

BRIEF EXERCISE 7.15

Landstalker
Cash ............................................................................ 682,500
Due from Factor1 ............................................................ 37,500
Loss on Disposal of Receivables2 .................................. 30,000
Accounts Receivable .......................................... 750,000
1
($750,000 x 5%)
2
($750,000 x 4%)
Leander
Accounts Receivable ...................................................... 750,000
Accounts Payable ............................................... 37,500
Financing Revenue ............................................. 30,000
Cash .................................................................... 682,500

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BRIEF EXERCISE 7.16
Cash ............................................................................ 682,500
Due from Factor2 ............................................................ 37,500
Loss on Disposal of Receivables2 .................................. 39,000
Accounts Receivable .......................................... 750,000
Recourse Liability .............................................. 9,000
1
($750,000 x 5%)
2
($750,000 x 4% = $30,000 + $9,000)

BRIEF EXERCISE 7.17

Cash ............................................................................ 620,000

Loss on Disposal of Receivables.................................... 6,000
Accounts Receivable .......................................... 600,000
Servicing Liability.............................................. 26,000

BRIEF EXERCISE 7.18

The accounts receivable turnover ratio is calculated as follows:

Net Sales
Average Trade Receivables (net)

$342,606 = 12.41 times

$26,973 + $28,223
2

3
The average collection period for accounts receivable in days is

365 days = 365

= 29.41 days
Accounts Receivable Turnover 12.41

BRIEF EXERCISE 7.19

2016:
The accounts receivable turnover ratio is calculated as follows:
Net Sales
Average Trade Receivables (net)

$21,719 = 7.25 times

$2,979 + $3,009
2
The average collection period for accounts receivable in days is
365 days = 365
= 50.34 days
Accounts Receivable Turnover 7.25

2015:
The accounts receivable turnover ratio is calculated as follows:
Net Sales
Average Trade Receivables (net)

$21,514 = 7.08 times

$3,009 + $3,069
2
The average collection period for accounts receivable in days is

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 365 days = 365
= 51.55 days
Accounts Receivable Turnover 7.08

As indicated from these ratios, BCE Inc.’s accounts receivable turnover ratio improved in 2016
(to 7.25 times from 7.08 times in 2015). BCE’s average collection period improved as well, to
50.34 days from 51.55 days in 2015).
EXERCISE 7.7

Balance, January 1, 2020 $400,000

Bad debt expense accrual .8% X ($80,000,000 X 0.9) 576,000
976,000
Uncollectible receivables written off (500,000)
Balance, December 31, 2020 before adjustment 476,000
Allowance adjustment 49,000
Balance, December 31, 2020 $525,000

Bad Debt Expense ............................................................... 49,000

Allowance for Doubtful Accounts .......................... 49,000

EXERCISE 7.11

a. Interest bearing note – Option 1:

September 30, 2020

Notes Receivable ............................................................. 105,000
Accounts Receivable............................................ 105,000

December 31, 2020

Interest Receivable .......................................................... 2,100

5
 Interest Income1 ................................................... 2,100
1
($105,000 X 8% X 3/12)

September 30, 2021

Cash 113,400
Interest Receivable ............................................... 2,100
Interest Income2 ................................................... 6,300
Notes Receivable ................................................. 105,000
2
($105,000 X 8% X 9/12)

b. Non-interest bearing note – Option 2:

September 30, 2020
Notes Receivable ............................................................. 105,000
Accounts Receivable............................................ 105,000

December 31, 2020

Notes Receivable ............................................................. 2,100
Interest Income3 ................................................... 2,100
3
($105,000 X 8% X 3/12)

September 30, 2021

Notes Receivable ............................................................. 6,300
Interest Income4 ................................................... 6,300
4
($105,000 X 8% X 9/12)
To record interest income
Cash 113,400
Notes Receivable ................................................. 113,400
To record the collection of the note receivable

c. There is no difference in the amount of interest income earned in 2020 and 2021 because
both options bear interest at 8%. The “non-interest bearing” note has the interest included

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 in the face amount of the note and is journalized to account for this. The actual interest
earned is the same under both options.

d. The liquidity of Big Corp. at December 31, 2020 will remain unchanged whichever option is
selected. Under option 1, the note balance remains at $105,000 but interest receivable of
$2,100 results in a total of $107,100 under current assets. Under Option 2, the balance of the
note, after recording the accrual of interest income is also $107,100 under current assets. The
cash flows will also be the same under both options as the amount collected at the maturity
of the note is $113,400.

EXERCISE 7.14

a. Notes Receivable ...................................................... 159,438

Service Revenue ............................................ 159,438*
* Present value of note:
PV of $200,000 due in 2 years at 12%
$200,000 X .79719 = $159,438

Notes Receivable ....................................................... 19,133

b.
Interest Income1 ............................................ 19,133
1
($159,438 X 12%)

c. Notes Receivable ....................................................... 21,429

Interest Income2 ............................................. 21,429
2
[($159,439 + $19,133) X 12%]
Cash ........................................................................ 200,000
Notes Receivable .......................................... 200,000

d. The balance of the note at December 31, 2020 is $178,571 ($200,000 less discount balance
of $21,429). The note would be classified as a current asset on the SFP as the maturity date
of the note of December 31, 2021 is within the next fiscal year.

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e. 2021 & 2022 interest income would be $20,281 per year.
[($200,000 – 159,438) / 2 = $40,562 / 2 years = $20,281]

f. Fair value of the consulting services provided can be used to value and record the
transaction, instead of fair value of the note received.

EXERCISE 7.19
a. Cash .................................................................. 210,000
Accounts Receivable............................................. 200,000
Sales Revenue ........................................... 410,000
To record sales revenue

Cash .................................................................. 140,000

Accounts Receivable................................. 140,000
To record collections on account

b. Accounts Receivable Turnover = Net Sales

Average Trade Receivables (net)
Using credit sales $200,000
= ($25,000 + $85,0001)/2
3.64 times
or about 100 days
1
$25,000 beginning A/R + $200,000 credit sales – $140,000 collections on A/R during year =
$85,000
c. Patuanak Company’s accounts receivable turnover ratio has declined. That is, relative to
sales, their receivables are being collected at a slower rate (3.64 < 4.85) or 100 days to
collect versus 75 days in the prior year. This could be a bad trend for future liquidity, if
customers continue to pay slowly. Jones may want to consider offering early payment
(cash) discounts.
Credit sales are a better measure in the calculation of accounts receivable turnover ratio
since cash sales do not affect accounts receivable balances and therefore could be the cause
of a biased interpretation of the speed at which accounts receivable are collected.

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 It should be noted that credit sales are not always available when performing analysis and
calculating the accounts receivables turnover ratio. When not available, the figure of net
sales should be used. As long as the calculation is done consistently between years, or
between businesses, the comparison will remain fair.

EXERCISE 7.20

a.
Accounts Receivable Turnover = Sales (All Revenues)
Average Receivables
2017 = $3,656,548
($357,896 + $152,403)/2
= 14.33 times
or about 25.5 days
2016 = $3,766,437
($152,403 + $614,255)/2
= 9.83 times
or about 37.1 days

b. The accounts receivable turnover ratio has improved from 9.83 times to 14.33 times in a
single year. While revenue has decreased slightly (about 3%), the disproportionately high
balance in accounts receivable at April 30, 2015 can explain the reason for this. Based also
on the information concerning the levels of revenue from the company’s single largest
tenant (85%), Becker is economically dependent on this particular tenant and is likely
negotiating special terms for payment, which can significantly affect the balance of
accounts receivable at any point in time. Also, depending on the payment terms and timing
with this key customer, this can significantly affect the accounts receivable balance at year
end. Consequently, the accounts receivable turnover ratio may not be a useful tool in
determining management’s effectiveness in collecting and turning over accounts
receivable in general.

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c. Based also on the information concerning the levels of revenue from the company’s single
largest tenant, Becker is economically dependent on this particular tenant. The principle
of full disclosure would require this information to be disclosed.

PROBLEM 7.5
2,740
Bad Debt Expense ..................................................................
Accounts Receivable.................................................. 2,740
To correct bad debt expense and write off accounts
receivable

Accounts Receivable.............................................................. 4,840

Unearned Revenue ..................................................... 4,840
To reclassify credit balance in accounts receivable

Allowance for Doubtful Accounts ......................................... 4,200

Accounts Receivable.................................................. 4,200
To write off $4,200 of uncollectible accounts

(Note to instructor: Many students will not make this entry at this point. Because $4,200 is totally
uncollectible, a write off immediately seems most appropriate. The remainder of the solution
therefore assumes that the student made this entry.)

Allowance for Doubtful Accounts ........................................... 7,975

Bad Debt Expense ........................................................ 7,975
To reduce allowance for doubtful account balance

Balance ($8,750 + $18,620 – $2,740 – $4,200) $20,430

Corrected balance (see below) 12,455
Adjustment $ 7,975

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 Aging
Age Balance Sch.

Under 60 days $172,342 1% $ 1,723

61-90 days 141,330 ($136,490 + $4,840) 3% 4,240
91-120 days 37,184 ($39,924 – $2,740) 7% 2,603
Over 120 days 19,444 ($23,644 – $4,200) 20% 3,889
$12,455
If the student did not make the entry to record the $4,200 write off earlier, the following would
change in the problem. After the adjusting entry for $7,975, an entry would have to be made to
write off the $4,200.

Balance ($8,750 + $18,620 – $2,740) $24,630

Corrected balance (see below) 16,655
Adjustment $ 7,975

Aging
Age Balance Schedule

Under 60 days $172,342 1% $ 1,723

61-90 days 141,330 3% 4,240
91-120 days 37,184 7% 2,603
Over 120 days 23,644 — 8,089*
$16,655

*$4,200 + (20% X $19,444)

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PROBLEM 7.6
-1-
Cash 146,000
Accounts Receivable................................................ 146,000

-2-
Allowance for Doubtful Accounts ....................................... 39,500
Accounts Receivable ............................................... 39,500

-3-
Accounts Receivable............................................................ 16,700
Allowance for Doubtful Accounts ........................... 16,700
To reinstate the account written-off and now determined to
be collectible

Cash 16,700
Accounts Receivable................................................ 16,700
Collection on account

-4-
Bad Debt Expense1 .............................................................. 27,500
Allowance for Doubtful Accounts ........................... 27,500
1
($47,300 + $16,700 – $39,500 = $24,500;
$52,000 – $24,500 = $27,500)

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