Chapter 7 In Class Exercises Cash & Receivables In Class Exercise #1 Allowance for Doubtful Accounts SDLI, Inc.

c. grants its customers 30 days credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2005, accounts receivable were $1,250,000 and the allowance account had a credit balance of $106,000. Accounts receivable activity for 2006 was as follows: Beginning balance Credit sales Collections Write-offs Ending balance $1,250,000 3,800,000 (3,745,000) (82,000) $1,223,000

The companys controller prepared the following aging summary of year-end accounts receivable: Summary Age Group 0-60 days 61-90 days 91-120 days Over 120 days Total Amount $ 825,000 220,000 50,000 128,000 $1,223,000 Percent Uncollectible 2% 10% 30% 40%

Required: 1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year. 2. Prepare the necessary year-end adjusting entry for bad debt expense. 3. What is total bad debt expense for 2006? How would accounts receivable appear in the 2006 balance sheet?

In Class Exercise #2 Notes Receivable On January 1, 2010, Arden Farm Equipment Company sold a machine to Valco Brothers Farm accepting a note receivable in lieu of a cash payment. Valco gave Arden a 3 year, $120,000 note bearing interest at 8%. Interest payments are made annually. The market rate for a note of similar risk is 10%.
A) B) C) Record the journal entry at the point of sale. Record the journal entry for the first years interest payment. Calculate the amount of interest revenue recorded in year two.

Selected information from PV Tables: Present Value of $1

1 2 3 8% .92593 .85734 .79383 10% .90909 .82645 .75132

Present Value of Ordinary Annuity of $1

1 2 3 8% .92593 1.78326 2.57710 10% .90909 1.73554 2.48685

In Class Exercise #3 Sale of Receivables Mountain High Ice Cream Company factored $60,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. The bank charges a 2% fee payable at the time of the sale. Mountain High anticipates a $3,000 recourse obligation. Prepare the required journal entry for the sale of receivables to Prudential bank.

In Class Exercise #4 Allowance for Doubtful Accounts As of 12/31/08, Chase Company had an Accounts Receivable balance of $2,000,000 and an Allowance for Doubtful Accounts balance of $150,000. Chase recently determined that customer accounts worth $10,000 were no longer collectible and needed to be written off. This is not yet reflected in the balances above. At the end of the year, Chase believes that 6.5% of the outstanding A/R may not be collectible. Prepare the journal entries to record the write-off as well as the adjusting entry for the Allowance for Doubtful Accounts.