Chapter 7 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS - CHAPTER 7
1. Accounts receivable are the expected future receipts when a

company permits one of its customers to buy now and pay
later. The amounts are usually small with a short term to
maturity.
Notes Receivable have longer terms to maturity and are
usually for larger amounts. The note specifies the maturity
date, interest rate, and other credit terms.
2. The net realizable value is the amount expected to be

collected from accounts receivable. It is the face amount of
receivables less an allowance for uncollectible accounts.
3. The going concern assumption is based upon the premise

that since companies believe that they will continue to
operate, they assume that they will be responsible for
paying the full balance of their obligations. Accordingly,
receivables are carried at net realizable value and payables
at full value on the balance sheet.
4. The allowance method is a method of accounting for bad

debts where bad debts are estimated and expensed in the
same period in which the corresponding sales are
recognized. The receivables are reported at net realizable
value in the financial statements.
The direct write-off method is the practice of recognizing
bad debt expense only when accounts are determined to be
uncollectible.
5. The most common format for reporting accounts receivable

on the balance sheet is gross receivables less the allowance
for doubtful accounts. This format allows the users to see
both the total amount owed by the customers and the
amount the company expects to collect.
6. Estimating bad debts expense improves the accuracy of

financial statements by (1) reporting expected realizable
value of receivables (i.e., future cash flows) and (2)
presenting a better matching of expenses with related
revenues. This provides a better measure of managerial
performance.
7-1
7. The practice of reestablishing a previously written off
account, then recording its collection as a payment on
account, reflects a complete record of account activity. Such
a record provides an accurate picture of the source of cash
flows and improves the customer’s credit history.
8. Factors for use in estimating bad debts include:

(1) the percentage of uncollectible accounts from years'
past.
(2) adjustment for new circumstances that are anticipated to
be experienced in the future.
(3) industry averages or experiences of similar businesses.
(4) examination of current accounts and company credit
policies.
9. Recognizing bad debts expense reduces accounts receivable

on the asset side and reduces the retained earnings on the
equity side.
10. A write-off of an uncollectible account when the allowance

method is used has no effect on the accounting equation
because the allowance account, a contra asset account, is
reduced and the accounts receivable account, also on the
asset side, is reduced.
When the direct method is used, a write-off of an

uncollectible account reduces assets (accounts receivable)
and reduces retained earnings (increases bad debts
expense).
11. The recovery of a bad debt when the allowance method is

used does not affect the income statement. Only accounts
receivable, cash, and allowance for doubtful accounts are
affected. Cash flow from operations increases as a result of
the collection.
12. The advantage of using the allowance method is that it

improves the accuracy of the financial statements; the
advantage of using the direct write-off method is that it is
convenient to use.
7-2
13. The direct write-off method is not GAAP, but is allowed if the
amount of uncollectible accounts is immaterial (i.e.,
insignificant).
14. It is generally beneficial to accept major credit cards

because the business then avoids the risk of bad debts as
well as the cost of maintaining credit records. It may also
attract more customers.
15. The acceptance of major credit cards enables a business to
avoid the cost of uncollectible accounts and the clerical costs
of maintaining accounts receivable records. In addition, the
business avoids the implicit cost of lost opportunities due to
delayed cash flows.
16. Warranty - a promise to correct a deficiency or

dissatisfaction in quality, quantity, or performance.
17. The recognition of warranty expense reduces the amount of

retained earnings shown on the balance sheet and reduces
net income on the income statement. It also increases the
amount of liabilities on the balance sheet.
18. Warranty cost is shown on the statement of cash flows when

the actual cost is incurred (i.e., paid).
19. At maturity, the amount due on an interest-bearing note is

the face amount plus accrued interest. Discount notes have
the interest included in the face value of the note.
20. The carrying value of a discount note is computed by

subtracting the amount of unamortized interest held in the
discount on notes payable account from the face value
amount shown in the notes payable account.
21. The effective rate of interest is higher on the discounted

note because the actual amount of interest paid is more than
the amount of the discount rate applied to the amount of
cash received at issue. The amount received when making
discount notes is less than that of interest-bearing notes
because the interest portion is subtracted.
7-3
Discounted Interest
Bearing
Face Value $10,000
$10,000
Less: Discount ($10,000 x .12) (1,200)
-0-
Proceeds $ 8,800 $10,000
Effective Interest Rate:

Discounted Note: $1,200 ÷ $8,800 = 13.6%
Interest-Bearing Note: $1,200 ÷ $10,000= 12.0%
7-4
22. Amortization of discount reduces net income on the income
statement, increases the carrying value of notes payable on
the balance sheet, and does not affect the statement of cash
flows.
23. Event Effect on Accounting Equation
Issuing Discount Note Increase in Cash (asset);

Increase in Notes Payable
(liability); Increase in Discount
on Notes Payable (contra
liability)
Amortization of Discount Decrease in Discount on

Notes Payable (contra liability);
Decrease in Retained Earnings
(equity)
Payment of Note at Maturity Decrease in Cash (asset);

Decrease in Notes Payable
(liability)
24. Discount on Notes Payable is a contra-liability account that is

subtracted from the face value of the note to determine the
carrying value of the liability.
25. Accounts
Receivable = Sales
Turnover Accounts Receivable
The A/R turnover tells how many times during the year on
average accounts receivable is collected (i.e., converted to
cash).
26. Average Days

to Collect = 365
Accounts Receivable Accounts Receivable Turnover
This ratio tells the user how many days it takes a company to
collect its accounts receivable.
7-5
27. No, accounting terminology is not even standard in English-
speaking countries. In the U.K. sales is called “turnover,”
inventory is “stocks,” and the “gearing ratio” refers to the
debt-to-assets ratio. Knowing this terminology is important
for companies involved in international trade.
7-6
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 7
EXERCISE 7-1A
a. and c.
Stateline Auto Service
T-Accounts
Assets = Liabilities + Stockholders’
Equity
Cash Retained Earnings
2004 2004
2. 18,000 cl 19,800
B 18,000 Bal19,800
al. .
2005
3. 19,000 Service Revenue
B 37,000 2004
al.
cl 20,00 1. 20,000
0
Accounts Receivable Bal -0-
.
2004 2005
1. 20,000 2. 18,000 2. 22,000
B 2,000 Bal22,000
al. .
2005
2. 22,000 1. 160 Bad Debts Expense
3. 19,000 2004
B 4,840 3. 200 cl 200
al.
B -0-
al.
Allow. For Bad Debts 2005
2004 4. 220
3. 200 B 220
al.
Bal 200
.
2005
1. 160 4. 220
7-7
Bal 260
.
Note: Closing entries for 2005 were not made because they
were not necessary to answer the questions.
7-8
EXERCISE 7-1 (cont.)
b. (1) Net Income for 2004: $19,800 ($20,000 − $200)

(2) Net Cash Flow from Operating Activities: $18,000
(3) Balance of Accounts Receivable, 12/31/2004: $2,000
(4) Net Realizable Value of Accounts Receivable,
12/31/2004: $1,800 ($2,000 − $200)
c. (1) Net Income for 2005: $21,780 ($22,000 − $220)

(2) Net Cash Flow from Operating Activities:$19,000
(3) Balance of Accounts Receivable, 12/31/2004: $4,840
12/31/2004: $4,580 ($4,840 − $260)
7-9
EXERCISE 7-2A
Even Asset = Liab + S. R – E = Net Cash

t s . Equity ev. xp. Inc. Flow
1. + NA + + NA + NA
2. +/− NA NA NA NA NA + OA
3. − NA − NA + − NA
4. +/− NA NA NA NA NA NA
7-10
EXERCISE 7-3A
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance $ 2,000
Plus: Revenue on Account 9,000
Less: Write-off (110)
Less: Ending Balance (2,200)
Collections of Accounts $ 8,690
Rec.
b. Analyze the Allowance for Doubtful Accounts account:
Allowance for Doubtful Accounts

Beginning Balance $100
Less: Ending Balance (170)
Bad Debts Expense $180
Note to Instructor: This information can also be shown in T-

Account format.
7-11
EXERCISE 7-4A
Selected T-Accounts:
Cash Allowance for Doubt Sales Revenue

Acct.
2007 12/31/06 2007
2. 920 Bal. 3,200 3.
204,000
4.197,000 2007
1. 3,400 2. 920
Accounts Receivable 5. 4,080 Bad Debts Expense
12/31/06 Bal. 4,800 2007
Bal. 5. 4,080
97,000
2007
2. 920 1. 3,400
3.204,000 2. 920
4.
197,000
Bal.
100,600
2007 transactions:
1. Bad accounts written off: $3,400
2. Collected previously written off accounts: 920
3. Sales on account: 204,000
4. Collections of accounts receivable: 197,000
5. Bad Debts Expense (204,000 x 2%): 4,080
a. 1. Allowance for Doubtful Accounts, 12/31/07:$ 4,800

2. Accounts Receivable, 12/31/07: 100,600
3. Net Realizable Value ($100,600 – $4,800): 95,800
b. Bad Debts Expense 2007 ($204,000 x 2%): $4,080
c. The recovery of previously written off accounts will cause

two asset exchange transactions. First, reinstate the
accounts receivable; + Accounts Receivable, +Allowance
for Doubtful Accounts. Second, record the collection of the
accounts receivable; +Cash, – Accounts Receivable.
7-12
7-13
EXERCISE 7-5A
Accounts Receivable Allowance for Doubt. Accts.

Cr. Sales 352,000 Coll. 320,000 Chg. Off 320 Est. 3,520
Chg. Off 320 Bal. 3,200
Bal. 31,680
a.
1. $31,680 (see above)
2. $3,200
3. $3,520 ($352,000 x 1%)
4. $31,680 − $3,200 = $28,480
b.
1. $31,680 (same as above)
2. $320 (the amount charged off)
3. $31,680 (the balance of accounts receivable)
7-14
EXERCISE 7-6A
a.
Ben’s Repair Shop

Horizontal Statements Model
Balance Sheet Income Statement Statement of

Even Assets = Liab + S. Rev. – Exp. = Net Cash Flows
t . Equity Inc.
Cash + Acct. = + Ret.
Rec. Ear.
2006
1. 12,000 + NA = NA + 12,000 12,00 − NA = 12,000 12,000 OA
0
2. NA + 1,500 = NA + 1,500 1,500 − NA = 1,500 NA
3. (8,200) + NA = NA + (8,200) NA − 8,200 = (8,200) (8,200) OA
Bal. 3,800 + 1,500 = NA + 5,300 13,50 − 8,200 = 5,300 3,800 NC
0
2007
4. NA + (50) = NA + (50) NA − 50 = (50) NA
Bal. 3,800 + 1,450 = NA + 5,250 -0- − 50 = (50) NA
b. Net Income for 2006: $5,300
7-15
EXERCISE 7-6A (cont.)
c.
Ben’s Repair Shop
General Journal
Date Account Titles Debit Credit
2006
1. Cash 12,000
Sales Revenue 12,000
2. Accounts Receivable 1,500
Sales Revenue 1,500
3. Operating Expenses 8,200
Cash 8,200
2007
4. Bad Debts Expense 50
Accounts Receivable 50
7-16
EXERCISE 7-7A
a.
Big Elk Hunting Lodge

Balance Sheet Income Statement Statement

of
Assets = L + S. Rev. − Exp. = Net Cash Flows
iab. Equity Inc.
Even Cash + Acc. Rec. = + Ret.
t Ear
1. + 76,800 = NA + 76,800 80,000 − 3,20 = 76,800 NA

0
2. 76,80 + ( 76,800) = NA + NA NA − NA = NA 76,800
0 OA
b. 1. Total assets: Cash $ 76,800
2. Revenue recognized: $ 80,000
3. Cash Flow from Operating Activities:$ 76,800
4. By accepting credit cards rather than allowing customers to purchase goods

on account, Big Elk Hunting Lodge avoids the risk of bad debts as well as the
expense of maintaining and collecting accounts receivable.
7-17
EXERCISE 7-8A
a. & b.
Even Account Title Debit Credit
t
a. Accounts Receivable 3,346.50
Credit Card Expense ($3,450 x 103.50
3%)
Sales Revenue 3,450.00
b. Cash 3,346.50
Accounts Receivable 3,346.50
c. Net Income Sales $3,450.00

Credit Card Expense (103.50)
Net Income $3,346.50
7-18
EXERCISE 7-9A
Note: T-Accounts are provided for the use of the instructor.
Equity
Cash Warranties Sales Revenue
Payable
Sales Pur. Pd. 320 Est. 5,500 Sales
110,000 75,000 110,000
Pd. 320 Bal. 5,180
Bal. Cost of Goods Sold
34,680
Sold
75,000
Mdse. Inventory
Pur. Sold Warranty Expense
75,000 75,000
Bal. -0- Est. 5,500
Taylor’s Computers
Financial Statements
Income Statement
Sales Revenue $110,000
Cost of Goods Sold (75,000)
Gross Margin 35,000
Warranty Expense (5,500)
Net Income $ 29,500
Statement of Cash Flows
Cash Flows From Operating Activities:
Inflow from Customers $110,00
0
Outflow for Inventory (75,000)
Outflow for Warranty Expense (320)
Net Cash Flow from Operating Activities $34,680
Cash Flows From Investing Activities -0-
Cash Flows From Financing Activities -0-
Net Change in Cash 34,680
7-19
Plus: Beginning Cash Balance -0-
Ending Cash Balance $34,680
7-20
The difference between net income and cash flows from

operating activities is the difference in the amount of
warranty expense accrued and the amount actually paid. The
estimated warranty expense based on a percent of sales
amounted to $5,500, but only $320 of that amount was
actually paid.
7-21
EXERCISE 7-10A
a.
Even Asset = Liab + S. R − E = Net Cash
Est. NA = + + − NA − + = − NA
Pd. − = − + NA NA − NA = NA − OA
Event Account Titles Debit Credit

b.
Est. Warranty Expense 900
Warranties Payable 900
c.
Paymen Warranties Payable 315
t
Cash 315
d. Companies can match the warranty expense with the

revenue that will produce the repairs. This concept follows
the matching principle.
7-22
EXERCISE 7-11A
Cash Notes Payable Service Revenue

1. 44,0001 1. 50,000 2.
36,800
2. 36,800 Bal. Bal.
50,000 36,800
Bal.
80,800
Disc. on Notes Pay. Interest Expense
1. 6,000 3. 5,000 3. 5,0002
Bal. 1,000 Bal.5,000
1
$50,000 x 12% = $6,000; $50,000 − $6,000 = $44,000
2
$6,000 x 10/12 = $5,000
a. Total Liabilities:
Notes Payable $50,000
Less: Discount on Notes (1,000)
Payable
Total Liabilities $
49,000
b. Income Reported on the Income Statement:

Service Revenue $36,800
Less: Interest Expense (5,000)
Net Income $31,800
c. Cash Flows From Operating Activities:

7-23
d.
Barnes General Journal
3/1/06 Cash 44,000
Discount on Notes Payable 6,000
Notes Payable 50,000
12/31/0 Interest Expense 5,000
6
2/28/07 Notes Payable 50,000
Cash 50,000
7-24
EXERCISE 7-12A
a.
of
Even Asset = Liabilities + S. Rev. − Exp. = Net Cash
t s Equity Inc. Flows
Cash = Notes Pay. − Disc. on + Ret.
NP Ear.
1. 17,60 = 20,000 − 2,400 + NA NA − NA = NA 17,600 FA

0

of
Even Asset = Liabilities + S. Rev. − Exp. = Net Cash Flows
t s Equity Inc.
Cash = Notes Pay. + Int. Pay. + Ret.
Ear.
2. 20,00 = 20,000 + NA + NA NA − NA = NA 20,000 FA

0
b. Discount Note: 20,000 x 12% = $2,400

Interest-beraing Note: 20,000 x 12% = $2,400
c. Discount Note: Principal $17,600

Interest-bearing Note: Principal $20,000
d. Effective Interest Rate = Interest Paid ÷ Principal Amount
Discount Note: $2,400 ÷ $17,600 = 13.64%
7-25
Interest-bearing Note: $2,400 ÷ $20,000 = 12%
The effective interest rate is higher for the discount note. Both notes paid the
same amount of interest, but only $17,600 of cash was received from the loan for
the discount note.
7-26
EXERCISE 7-13A
Ray Co
General Journal
a.
6/1/06 Cash 27,000
b.
12/31/0 Interest Expense* 1,750
6
c.
5/31/07 Interest Expense** 1,250
Cash 30,000
*$3,000 x 7/12 = $1,750

**$3,000 x 5/12 = $1,250
7-27
EXERCISE 7-14A a.
A-1 Steel Co. T-Accounts, 2007
Assets = Liabilities + Stockholders’ Equity
Cash Accounts Payable Common Stock
Bal. 3,000 Bal. Bal.
7,500 12,000
1. 5,000 7. 1,100 10. 52,000 2. 47,000 1. 5,000
6. 7,280 8. 9,600 Bal.2,500 Bal.
17,000
9. 75,000 10.
52,000
11. 2,000 Warranties Payable Retained Earnings
Bal. 7. 1,100 4. 3,280 Bal.
25,580 18,700
Bal.2,180
Dividends
Accounts Receivable 11. 2,000
Bal. Notes Payable Bal. 2,000
15,000
3a. 5. 600 6. 8,000
82,000
9. 75,000 Bal. Sales Revenue
8,000
Bal. 3a.
21,400 82,000
Discount on Notes Bal.
Pay. 82,000
Allow. for Doubt. 6. 720 13. 240
Acct.
Bal. 800 Bal. 480 Cost of Goods Sold
5. 600 3b. 46,000
12. 820 Bal.46,000
Bal. 1,020
Warranty Expense
Merchandise 4. 3,280
Inventory
Bal. Bal. 3,280
21,000
2. 47,000 3b.
46,000
Bal. Salaries Expense
22,000
8. 9,600
Bal. 9,600
7-28
Bad Debts Expense
12. 820
Bal. 820
Interest Expense
13. 240
Bal. 240
4: $82,000 x 4% = $3,280
6: $8,000 x 9% = $720
12: $82,000 x 1% = $820
13: $720 x 4/12 = $240
b.
A-1 Steel Company
For the Year Ended December 31, 2007
Income Statement
Sales Revenue $ 82,000
Gross Margin 36,000
Operating Expenses
Salaries Expense $ 9,600
Warranty Expense 3,280
Bad Debts Expense 820
Total Operating Expenses (13,700)
Operating Income 22,300
Interest Expense (240)
Net Income $22,060
Statement of Changes in Stockholders’ Equity

Beginning Common Stock
$12,000
Plus: Stock Issued 5,000
Ending Common Stock $17,000
7-29
Beginning Retained 18,700
Earnings
Plus: Net Income 22,060
Less: Dividends (2,000)
Ending Retained Earnings 38,760
Total Stockholders’ Equity $55,760
7-30
EXERCISE 7-14A b. (cont.)
A-1 Steel Company

Balance Sheet
As of December 31, 2007
Assets
Cash $
25,580
Accounts Receivable $21,400
Less: Allowance for Doubtful (1,020) 20,380
Accounts
Merchandise Inventory 22,000
Total Assets $ 67,960
Liabilities
Accounts Payable $ 2,500
Warranties Payable 2,180
Notes Payable $ 8,000
Less: Discount on Notes Payable (480) 7,520
Total Liabilities 12,200
Stockholders’ Equity
Common Stock 17,000
Retained Earnings 38,760
Total Stockholders’ Equity 55,760
Total Liabilities and Stockholders’ $ 67,960
Equity
7-31
EXERCISE 7-14A b. (cont.)
A-1 Steel Company

Cash Flows From Operating

Activities:
Inflow from Customers $ 75,000
Outflow for Expenses (10,700)
Net Cash Flow from Operating $12,30
Activities 0
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Stock Issue 5,000
Outflow for Dividend (2,000)
Inflow from Loan 7,280
Net Cash Flow from Financing 10,280
Activities
Plus: Beginning Cash Balance 3,000
0
7-32
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 7
PROBLEM 7-15A
a.
Event Type of
Number Transaction
2006
1. Asset Source
2. Asset Exchange
3. Asset Use
2007
1. Asset Source
2. Asset Exchange
3. Asset Exchange
4a. Asset Exchange
4b. Asset Exchange
5. Asset Use
6. Asset Use
b. 2006 and 2007

Effect of Transactions on Financial Statements
No. Assets = Liab. + S. Rev. − Exp. =Net Inc. Cash Flows

Equity
2006
1. + NA + + NA + NA
2. +− NA NA NA NA NA + OA
3. − NA − NA + − NA
2007
1. + NA + + NA + NA
3. +− NA NA NA NA NA NA
4a.* +− NA NA NA NA NA NA
4b. +− NA NA NA NA NA + OA
5. − NA − NA + − − OA
6. − NA − NA + − NA
*4a. is reinstatement of the previously charged off receivable; 4b is the

collection of the account.
7-33
PROBLEM 7-15A (cont.)
c.
Durm’s Consulting
2006
Service Revenue 40,000
2. Cash 34,000
Accounts Receivable 34,000
3. Bad Debts Expense* 800
Allowance for Doubtful 800
Accounts
*$40,000 x 2% = $800
Durm’s Consulting
T-Accounts 2006
Assets = Stockholders’
Equity
Cash Accounts Service Revenue
Receivable
2. 34,000 1. 40,000 2. 1. 40,000
34,000
Bal. Bal. Bal.
34,000 6,000 40,000
Allow. For
Doubtful Bad Debts Expense
Accounts
3. 800 3. 800
Bal. 800 Bal. 800
7-34
d.
Durm’s Consulting
For the Year Ended 2006
Income Statement
Bad Debts Expense (800)
Net Income $39,200
Beginning Common $ -0-
Stock
Plus: Stock Issued -0-
Ending Common Stock $ -0-
Beginning Retained -0-
Earnings
Ending Retained 39,200
Earnings
Total Stockholders’ $39,200
Equity
7-35
PROBLEM 7-15A d. (cont.)
Durm’s Consulting
Balance Sheet
Assets
Cash $34,000
Accounts Receivable $ 6,000
Less: Allowance for Doubtful (800) 5,200
Accounts
Total Assets $39,200
Liabilities $ -0-
Common Stock $ -0-
Total Liabilities and Stockholders’ $39,200
Equity


Activities:
Activities
Activities
Cash Flows From Financing -0-
Activities
7-36
7-37
PROBLEM 7-15A e. (cont.)
Durm’s Consulting
2006 Closing Entries
1. Service Revenue 40,000
2. Retained Earnings 800
Durm’s Consulting
T-Accounts 2006 Closing Entries
Equity
Cash Accounts Retained Earnings
Receivable
Bal. Bal. 6,000 2. 800 1. 40,000
34,000
Bal
39,200
Allowance for
Doubtful Accounts Service Revenue
Bal. 800 1. Bal.
40,000 40,000
Bal. -0-
Bad Debts
Expense
Bal. 800 2. 800
Bal. -0-
Durm’s Consulting
After Closing Trial Balance
December 31, 2006
Account Title Debit Credit
Cash $34,000
Allowance for Doubtful $ 800
7-38
Accounts
Totals $40,000 $40,000
c. (2007)
Durm’s Consulting
2007
2. Cash 47,500
3. Allowance for Doubtful 150
Accounts
4a. Accounts Receivable 12
Accounts
4b. Cash 12
Cash 36,500
6. Bad Debts Expense* 515
Accounts
*$51,500 x 1% = $515
7-39
PROBLEM 7-15A c. (cont.)
2007
Durm’s Consulting
T-Accounts 2007
Equity
Receivable
Bal. Bal. Bal.39,200
34,000 6,000
2. 47,500 5. 1. 51,500 2.
36,500 47,500
4b. 12 4a. 12 3. 150 Service Revenue
Bal. 4b. 12 1. 51,500
45,012
Bal. 9,850 Bal.
51,500
Allow. For
Accounts
Bal. 800 6. 515
3. 150 4a. 12 Bal. 515
6. 515
Bal. Operating
1,177 Expenses
5. 36,500
Bal.
36,500
7-40
PROBLEM 7-15A
d. (2007)
Durm’s Consulting
Income Statement
Expenses
Operating Expenses $36,500
Total Expenses (37,015)
Net Income $14,485

Stock
Earnings
Earnings
Equity
7-41
PROBLEM 7-15A d. (cont.)
2007
Durm’s Consulting
Balance Sheet
As December 31, 2007
Assets
Cash $45,012
Less, Allowance for Doubtful (1,177) 8,673
Accounts
Liabilities $ -0-
Common Stock $ -0-
Equity

Activities:
Activities
Activities
Activities
7-42
7-43
e. (2007)
Durm’s Consulting
2. Retained Earnings 37,015
Operating Expenses 36,500
Durm’s Consulting
Assets = Stockholders’ Equity
Cash Accounts Receivable Retained Earnings

Bal. 45,012 Bal. 9,850 Bal. 39,200
2. 37,015 1. 51,500
Bal. 53,685
Allow. For Doubtful
Accounts Service Revenue
Bal.1,177 1. 51,500 Bal. 51,500
Bal. -0-
Bad Debts Expense

Bal. 515 2. 515
Bal. -0-
Operating Expenses
Bal.36,500 2. 36,500
Bal. -0-
7-44
PROBLEM 7-15A e. (cont.)
2007
Durm’s Consulting
December 31, 2007
Cash $ 45,012
Allowance for Doubtful $ 1,177
Accounts
Totals $ 54,862 $ 54,862
7-45
PROBLEM 7-16A
Accounts Receivable Allowance for Doubtful

Accounts
1/1 Col Bad A/C 1/1 5,184
172,800 1,284,860 4,500
Sales Bad A/C 4,500 Est. 6,349
1,269,800
Bal. 153,240 Bal. 7,033
a. 1. $1,269,800 x .5% = $6,349
2. Accounts Receivable Balance, 12/31/07 $153,240

Less: Allowance for Doubtful Accounts, (7,033
12/31/07 )
Net Realizable Value $146,207
b.
Hill Cabinet Company
General Journal, 2007
t
1a. Accounts Receivable 1,269,800
Sales Revenue 1,269,800
1b. Cost of Goods Sold 800,000
Inventory 800,000
2. Cash 1,284,860
Accounts Receivable 1,284,860
3. Allowance for Doubtful 4,500
Accounts
4. Bad Debts Expense 6,349
Allowance for Doubtful 6,349
Accounts
7-46
c. Bad debts expense is an estimate of current receivables
that may eventually be uncollectible. The amount written
off as uncollectible is the actual amount that was
determined in the current accounting period to be
uncollectible.
7-47
PROBLEM 7-17A
a.

Equity
2004
1. + NA + NA NA NA + FA
2. +− NA NA NA NA NA − OA
3a. + NA + + NA + + OA
3b. + NA + + + + NA
3c. + NA + + NA + NA
3d. − NA − NA + − NA
6. − NA − NA + − NA
7. NA + − NA + − NA
8. − NA − NA + − − OA
Legend:
3a. Cash Sales
3b. Credit Card Sales (remember that credit card expense is
recorded).
3c. Sales on Account
3d. Cost of Sales
7-48
b.
Brigg’s Supply Co.
D Account Titles Debit Credit
ate
1. Cash 70,000
Common Stock 70,000
2. Merchandise Inventory 240,000
Cash 240,000
3a. Cash 100,000
3b. Accounts Receivable - Credit Card 242,500
Co.
Credit Card Expense 7,500
3c. Accounts Receivable 20,000
3d. Cost of Goods Sold 190,000
4. Cash 242,500
Accounts Receivable - Credit 242,500
Card Co.
5. Cash 16,000
7. Warranty Expense 650
Warranties Payable 650
8. Selling and Administrative Exp. 53,000
Cash 53,000
7-49
PROBLEM 7-17A b. (cont.)

T-Accounts
Cash Warranties Payable Common Stock

1. 70,000 2. 7. 650 1. 70,000
240,000
3a. 8. 53,000 Bal. 650 Bal. 70,000
100,000
4. 242,500
5. 16,000 Sales Revenue
Bal. 3a.
135,500 100,000
3b.
250,000
Accounts Receivable 3c. 20,000
3b.242,500 4. Bal.
242,500 370,000
3c. 20,000 5. 16,000
6. 240 Cost of Goods Sold
Bal. 3,760 3d.
190,000
Bal.
190,000
Merchandise
Inventory
2. 240,000 3d. Bad Debts Expense
190,000
Bal. 50,000 6. 240
Bal. 240
Credit Card Expense
3b. 7,500
Bal. 7,500
Warranty Expense
7. 650
Bal. 650
Selling & Adm.
Expense
8. 53,000
7-50
Bal. 53,000
7-51
c.
Income Statement
Cost of Goods Sold (190,000
)
Gross Margin 180,000
Operating Expenses
Bad Debts Expense $ 240
Warranty Expense 650
Selling & Adm. Expense 53,000
Total Operating (61,390)
Expenses
Net Income $118,610
Stock
Ending Common Stock $ 70,000
Earnings
Earnings
Equity
7-52

Balance Sheet
As of the End of the Year 2004
Assets
Cash $135,500
Liabilities
Warranties Payable $ 650
Common Stock $ 70,000
Equity
7-53


Activities:
Outflow for Inventory (240,000
)
Net Cash Flow from Operating $
Activities 65,500
Activities
Activities:
Cash Inflow from Stock Issued 70,000
Activities
0
7-54
PROBLEM 7-18A
a.
City Corp.

Equity
2001
1. + + NA NA NA NA + FA
2. − NA − NA + − − OA
3. + NA + + NA + + OA
4. NA + − NA + − NA
2002
1. + NA + + NA + + OA
2. − NA − NA + − − OA
3a. NA + − NA + − NA
3b. − − NA NA NA NA − OA,FA
7-55
City Corp.
General Journal 2001 and 2002
2001
1. Cash 36,400
2. Selling and Adm. Expenses 118,000
Cash 118,000
3. Cash 176,000
4. Interest Expense* 2,700
Closing Entries
5. cl Service Revenue 176,000
Selling and Adm. Expenses 118,000
Interest Expense 2,700
2002
1. Cash 292,000
2. Selling and Adm. Expenses 198,000
Cash 198,000
3a. Interest Expense* 900
Discount on Notes Payable 900
3b. Notes Payable 40,000
Cash 40,000
*2001: $3,600 x 9/12 = $2,700

2002: $3,600 x 3/12 = $900
7-56
City Corp.
General Journal, 2001 and 2002
Selling and Adm. Expenses 198,000
Interest Expense 900
7-57
City Corp.
T-Accounts
Cash Notes Payable Retained Earnings

2001 2001 2001
1. 36,400 2. 1. 40,000 cl 55,300
118,000
3. 176,000 Bal. Bal.
40,000 55,300
Bal. 94,400 2002 2002
2002 3b. 40,000 cl 93,100
1. 292,000 2. Bal. -0- Bal.
198,000 148,400
3b.
40,000
Bal. Discount on Notes Service Revenue
148,400 Pay.
2001 2001
1. 3,600 4. 2,700 cl 176,000 3. 176,000
Bal. 900 Bal. -0-
2002 2002
3a. 900 cl 292,000 1. 292,000
Bal. -0- Bal. -0-
Selling and Adm. Exp.

2001
2. 118,000 cl
118,000
Bal. -0-
2002
2. 198,000 cl 198,000
Bal. -0-
Interest Expense
2001
4. 2,700 cl 2,700
Bal. -0-
2002
3a. 900 cl 900
Bal. -0-
7-58
7-59
c.
City Corp.
Income Statements
2001 2002
Service Revenue $176,000 $292,000
Expenses
Selling and Adm. 118,000 198,000
Expenses
Interest Expense 2,700 900
Total Expenses (120,700) (198,900
)
Net Income $ 55,300 $ 93,100
Statements of Changes in Stockholders’ Equity
2001 2002
Beginning Common $ -0- $ -0-
Stock
Plus: Stock Issued -0- -0-
Ending Common Stock -0- -0-
Beginning Retained -0- 55,300
Earnings
Plus: Net Income 55,300 93,100
Ending Retained 55,300 148,400
Earnings
Total Stockholders’ $ 55,300 $148,400
Equity
7-60
City Corp.
Balance Sheets
2001 2002
Assets
Cash $94,400 $148,40
0
Total Assets $94,400 $148,40
0
Liabilities
Notes Payable $40,000 $ -0-
Less: Discount on Notes Payable (900) -0-
Total Liabilities 39,100 -0-
Common Stock -0- -0-
Retained Earnings 55,300 148,400
Total Stockholders’ Equity 55,300 148,400
Total Liabilities and Stockholders’ $94,400 $148,40
Equity 0
7-61
City Corp.
Statements of Cash Flows
2001 2002
Activities:
Inflow from Customers $176,000 $292,000
Outflow for Expenses (118,000 (198,000
) )
Ouflow for Interest -0- (3,600)
Net Cash Flow from Operating 58,000 90,400
Activities
Cash Flows From Investing -0- -0-
Activities
Activities:
Cash Inflow from Loan 36,400
Cash Ouflow to Repay Loan (36,400)
Net Cash Flow From Financing 36,400 (36,400)
Activities
Net Change in Cash 94,400 54,000
Plus: Beginning Cash Balance -0- 94,400
Ending Cash Balance $ 94,400 $148,400
7-62
PROBLEM 7-19A
Type Common Retain Net Cash

Even of Assets Liabilitie Stock ed Incom Flow
t Event s Earnin e
gs
a. AS + NA NA + + +
b. AU − NA NA − − −
c. AS + NA NA + + NA
d. AU − NA NA − − NA
e. AE +− NA NA NA NA +
f. AS + NA NA + + +
g. AE +− NA NA NA NA −
h. CE NA + NA − − NA
i. AS + NA NA + + NA
j. AS + NA NA + + +
k. AU − − NA NA NA −
l. AE +− NA NA NA NA +
m. AS + + NA NA NA +
n. AU − − NA NA NA −
o. CE NA + NA − − NA
7-63
PROBLEM 7-20A
Belmont Equipment Co.
Balance Sheet
Assets
Current Assets
Cash $ 17,800
Less: Allow. for Doubtful Accounts (4,000) 86,000
Interest Receivable 500
Prepaid Rent 9,600
Supplies 1,600
Notes Receivable 12,000
Total Current Assets $250,300
Property, Plant and Equipment
Equipment 60,000
Less: Accumulated Depreciation (30,000) 30,000
Land 36,000
Total Property, Plant and 66,000
Equipment
Liabilities and Stockholders’ Equity
Current Liabilities
Unearned Revenue 52,600
Interest Payable 1,800
Salaries Payable 9,200
Total Current Liabilities $110,900
Long-Term Liabilities
Less: Discount on Notes Payable (2,400)
Total Long-Term Liabilities 103,600
Common Stock 40,000
Retained Earnings 61,800*
Equity
*Must be computed: $10,400 + $59,400 − $8,000 = $61,800
7-64
Belmont Equipment Co.

Income Statement
For the Year Ending December 31, 2003
Operating Expenses
Salaries Expense $96,000
Bad Debts Expense 10,800
Non-Operating Items
Interest Revenue 4,200
Interest Expense (24,000)
Gain on Sale of Equipment 6,400
Total Non-Operating Items (13,400)
Net Income $ 59,400
7-65
PROBLEM 7-21A
T-Accounts provided for the use of the instructor.
Accounts Receivable
Bal. 30,000
Chg. Sales 240,000 Write-Off 1,600
Coll 240,400
End. Bal. 28,000

Bal. 2,000
Write-Off 1,600 Exp. 1,400
End. Bal. 1,800
Notes Payable
Bal. 40,000
End. Bal. 40,000
Discount on Notes Payable

Bal. 2,400
Exp. 800
End. Bal. 1,600
Warranties Payable
Bal. 3,600
Paid 1,700 Exp. 1,100
End. Bal. 3,000
a. Cash collected: $240,400

Bad Debts Expense: $1,400
Net Realizable Value: $28,000 − $1,800 = $26,200
b. Cash paid for warranties: $1,700
c. Interest recognized for the period: $800

Cash paid for interest: $-0-
Book Value of Discount Note: $40,000 − $1,600= $38,400
7-66
PROBLEM 7-22A
Water Way Sales & Service

General Journal
Accounts Payable 390,000
2a. Accounts Receivable 522,000
3. Cash 44,000
4a. Accounts Receivable - Credit 25,080
Card Co.
5. Cash 504,000
6. Accounts Payable 396,000
Cash 396,000
7. Selling and Administrative 150,000
Expenses
Cash 150,000
8. Cash 25,080
Accounts Receivable - Cr. 25,080
Card Co.
9. Cash 55,200
7-67

General Journal
Adjusting Entries
11a. Interest Expense* 1,200
11b. Warranty Expense 3,090
*$4,800 x 3/12 = $1,200
7-68
T-Accounts
Bal. 87,100 Bal. Bal. 90,000
44,000
3. 44,000 6. 396,000 6. 396,000 1.
390,000
5. 504,000 7. Bal. Retained Earnings
150,000 38,000
8. 25,080 Bal. 65,500
9. 55,200 Warranties Payable Bal. 65,500
Bal. 11b.
169,380 3,090
Bal. 3,090 Sales Revenue
Accounts Receivable 2a.
522,000
Bal. Disc. on Notes Pay. 4a. 26,400
17,800
2a. 5. 9. 4,800 11a. Bal.
522,000 504,000 1,200 548,400
4a. 8. 25,080 Bal. 3,600
25,080
10. 450 Service Revenue
Bal. 35,350 Notes Payable 3. 44,000
9. 60,000 Bal. 44,000
Merchandise Inventory Bal.
60,000
Bal. 94,600 Cost of Goods Sold
1. 390,000 2b. 2b. 364,000
364,000
4b. 4b. 18,600
18,600
Bal.102,000 Bal.
382,600
Credit Card Expense
4a. 1,320
Bal. 1,320
Selling & Adm. Exp.
7. 150,000
Bal.
150,000
Bad Debts Expense
10. 450
Bal. 450
7-69
Warranty Expense
11b. 3,090
Bal. 3,090
Interest Expense
11a. 1,200
Bal. 1,200
7-70
Water Way Sales and Service

Income Statement
Revenue
Total Revenue $592,40
0
Costs and Expenses
Cost of Goods Sold 382,600
Selling & Adm. 150,000
Expenses
Total Operating (537,460
Expenses )
Non Operating Items
Net Income $
53,740

Beginning Common $90,000
Stock
Earnings
7-71
Earnings
Equity

Balance Sheet
Assets
Cash $169,38
0
Liabilities
Accounts Payable $38,000
Less, Discount on Note (3,600) 56,400
Common Stock 90,000
Total Liab. and Stockholders’ $306,730

Equity
7-72

Activities:
Cash Receipts from Revenue $573,080
Cash Payment for Inventory (396,000)
Cash Payments for Expenses (150,000)
Net Cash Flow from Operating $ 27,080
Activities
Activities
Activities:
Cash Inflow from Note 55,200
Activities
7-73
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 7
EXERCISE 7-1B
a. and c.
Smith Dry Cleaning
T-Accounts
Equity
Cash Retained Earnings
2003 2003
2. 8,000 cl 9,900
B 8,000 Bal 9,900
al. .
2004
3. 10,000 Service Revenue
B 18,000 2003
al.
cl 10,00 1. 10,000
0
Accounts Receivable Bal -0-
.
2003 2004
1. 10,000 2. 8,000 2. 12,000
B 2,000 Bal12,000
al. .
2004
2. 12,000 1. 80 Bad Debts Expense
3. 10,000 2003
B 3,920 3. 100 cl 100
al.
B -0-
al.
Allow. For Bad Debts 2004
2003 4. 120
3. 100 B 120
al.
Bal 100
.
2004
1. 80 4. 120
7-74
Bal 140
.
Year 2004 closing entries are not shown. They are not needed to
answer the questions
7-75
EXERCISE 7-1B (cont.)
b. (1) Net Income for 2003: $9,900 ($10,000 − $100)

(2) Net Cash Flow from Operating Activities: $8,000
(3) Balance of Accounts Receivable, 12/31/2003:
$2,000
12/31/2003: $1,900
($2,000 − $100)
c. (1) Net Income for 2004: $11,880 ($12,000 − $120)

(2) Net Cash Flow from Operating Activities:$10,000
(3) Balance of Accounts Receivable, 12/31/2004:
$3,920
12/31/2004: $3,780 ($3,920 − $140)
7-76
EXERCISE 7-2B
Event Assets = Liab + Stk. Rev. – Exp. = Net Cash

. Equity Inc. Flow
Cash A. All for = + Ret.
Rec. DA Earn.
1. NA + NA = NA + + + − NA = + NA
2. + − NA = NA + NA NA − NA = NA + OA
3. NA − − = NA + NA NA − NA = NA NA
4. NA NA + = NA + − NA − + = − NA
7-77
EXERCISE 7-3B
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance $ 1,500
Plus: Revenue on Account 7,000
Less: Ending Balance (2,000)
Collections of Accounts $ 6,420
Rec.
b. Analyze the Allowance for Doubtful Accounts account:

Beginning Balance $150
Less: Ending Balance (175)
Bad Debts Expense $105
Note to Instructor: This information can also be shown in

T-Account format.
7-78
EXERCISE 7-4B
Selected T-Accounts:
Cash Allowance for Doubt Sales Revenue

Acct.
2008 12/31/07 2008
2. 900 Bal. 3,000 3.
200,000
4.190,000 2008
1. 3,500 2. 900
Accounts Receivable 5. 4,000 Bad Debts Expense
12/31/07 Bal. 4,400 2008
Bal. 5. 4,000
80,000
2008
2. 900 1. 3,500
3.200,000 2. 900
4.
190,000
Bal.
86,500
2008 transactions:
1. Bad accounts written off: $3,500
2a. Reinstated previously written-off accounts: 900
2b. Collected previously written off accounts: 900
3. Sales on account: 200,000
4. Collections of accounts receivable: 190,000
5. Bad Debts Expense; (200,000 x 2%) 4,000
a. 1. Allowance for Doubtful Accounts, 12/31/08:$ 4,400

2. Accounts Receivable, 12/31/08: 86,500
3. Net Realizable Value ($86,500 – $4,400): 82,100
b. Bad Debts Expense 2008 ($200,000 x 2%): $4,000
c. The recovery of the previously written off accounts will

not affect the income statement. The transaction is an
7-79
asset exchange transaction. The income statement is
only affected when bad debts expense is recognized.
7-80
EXERCISE 7-5B
Accounts Receivable Allowance for Doubt. Accts.

Cr. Sales 300,000 Coll. 260,000 Chg. Off 250 Est. 3,000
Chg. Off 250 Bal. 2,750
Bal. 39,750
a.
1. $39,750 (see above)
2. $2,750
3. $3,000 ($300,000 x 1%)
4. $39,750 − $2,750 = $37,000
b.
1. $39,750 (same as above)
2. $250 (the amount charged off)
3. $39,750 (the balance of accounts receivable)
7-81
EXERCISE 7-6B
a.
Valley Service Co.

Balance Sheet Income Statement Statement of

Even Assets = Liab + S. Rev. – Exp. = Net Cash Flows
t . Equity Inc.
Cash + Acct. = + Ret.
Rec. Ear.
2005
1. 10,000 + NA = NA + 10,000 10,00 − NA = 10,000 10,000 OA
0
2. NA + 2,000 = NA + 2,000 2,000 − NA = 2,000 NA
3. (8,000) + NA = NA + (8,000) NA − 8,000 = (8,000) (8,000) OA
4. NA + (70) = NA + (70) NA − 70 = (70) NA
Bal. 2,000 + 1,930 = NA + 3,930 12,00 − 8,070 = 3,930 2,000
0
b. Net Income for 2005: $3,930
7-82
c.
Valley Service Co.
General Journal
2005
1. Cash 10,000
Sales Revenue 2,000
Cash 8,000
7-83
EXERCISE 7-7B
a.
Denver One-Day Spa


of
Assets = L + S. Rev. − Exp. = Net Cash Flows
iab. Equity Inc.
Even Cash + Acct. = + Ret.
t Rec. Ear
1. NA + 114,000 = NA + 114,00 120,00 − 6,00 = 114,00 NA

0 0 0 0
2. 114,00 + (114,000 = NA + NA NA − NA = NA 114,000
0 ) OA
b. 1. Total assets: Cash $114,000
2. Revenue recognized: $120,000
3. Cash Flow from Operating Activities:$114,000
4. If a business maintains its own accounts receivable, i.e. it sells goods on

account, it must incur the cost of investigating customers in order to extend
credit. Then, the customer must be sent bills each month. If a customer is
slow paying, collection notices must be sent, and finally other collection
expense and bad debt charge off may occur. If a business uses credit cards for
its credit business, the only expense is the fee charged by the credit card
company.
7-84
EXERCISE 7-8B
a. & b.
t
a. Accounts Receivable 2,880
Credit Card Expense ($3,000 x 120
4%)
Sales Revenue 3,000
b. Cash 2,880
c. Net Income Sales $3,000

Credit Card Expense (120)
Net Income $2,880
7-85
EXERCISE 7-9B
Note: T-Accounts are provided for the use of the instructor.
Cash Warranties Sales Revenue
Payable
Sales Pur. Pd. 200 Est. 8,400 Sales
140,000 95,000 140,000
Pd. 200 Bal. 8,200
Bal. Cost of Goods Sold
44,800
Sold
95,000
Mdse. Inventory
Pur. Sold Warranty Expense
95,000 95,000
Bal. -0- Est. 8,400
Long’s Stereos
Income Statement
Gross Margin 45,000
Warranty Expense (8,400)
Net Income $ 36,600
Cash Flows From Operating Activities:
0
Outflow for Warranty Expense (200)
Activities
Cash Flows From Investing Activities -0-
Cash Flows From Financing Activities -0-
7-86
7-87
Total warranties liabilities at the end of the period is $8,200,

the balance of the Warranties Payable account.
7-88
EXERCISE 7-10B
a.
Even Asset = Liab + S. R − E = Net Cash
Est. NA = + + − NA − + = − NA
Pd. − = − + NA NA − NA = NA − OA
Event Account Titles Debit Credit

b.
Est. Warranty Expense 1,400
c.
Paymen Warranties Payable 596
t
Cash 596
d. Warranty obligations may be uncertain, but they usually

represent legal liabilities that must be recognized in the
accounts.
7-89
EXERCISE 7-11B
Cash Notes Payable Service Revenue

1. 1. 200,000 2. 55,000
180,000
2. 55,000 Bal. Bal.
200,000 55,000
Bal.
235,000
Disc. on Notes Pay. Interest Expense
1. 20,000 3. 15,000 3. 15,000*
Bal. 5,000 Bal.
15,000
* $20,000 x 9/12 = $15,000
a. Total Liabilities:
Less: Discount on Notes (5,000)
Payable
Total Liabilities $195,000
b. Income Reported on the Income Statement:

Less: Interest Expense (15,000)
Net Income $40,000
c. Cash Flows From Operating Activities:

7-90
d.
Davis General Journal
4/1/04 Cash 180,000
4
Cash 200,000
7-91
EXERCISE 7-12B
a.
of
Even Asset = Liabilities + S. Rev. − Exp. = Net Cash
t s Equity Inc. Flows
Cash = Notes − Disc. on + Ret. Ear.
Pay. NP
1. 27,00 = 30,000 − 3,000 + NA NA − NA = NA 27,000 FA

0

of
Even Asset = Liabilities +S. Rev. − Exp. = Net Inc. Cash
t s Equity Flows
Cash = Notes + Int. Pay. + Ret.
Pay. Ear.
2. 30,00 = 30,000 + NA + NA NA − NA = NA 30,000 FA

0
b. Discount Note: 30,000 x 10% = $3,000

Interest-bearing Note: 30,000 x 10% = $3,000
c. Discount Note: Principal $27,000

Interest-bearing Note: Principal $30,000
d. Effective Interest Rate = Interest Paid ÷ Principal Amount
Discount Note: $3,000 ÷ $27,000 = 11.11%
7-92
Interest-bearing Note: $3,000 ÷ $30,000 = 10%
The effective interest rate is higher for the discount note. Both notes paid the same
amount of interest, but only $27,000 of cash was received from the loan for the
discount note.
7-93
EXERCISE 7-13B
Lewis Co.
General Journal
a.
7/1/05 Cash 35,200
b.
12/31/0 Interest Expense* 2,400
5
c.
6/30/06 Interest Expense** 2,400
Cash 40,000
*$4,800 x 6/12 = $2,400

**$4,800 x 6/12 = $2,400
7-94
EXERCISE 7-14B
a.
Phillips Metal Co. T-Accounts, 2005
Bal. 4,000 Bal. Bal.
10,000 20,000
1. 4,000 7. 2,000 10. 2. 80,000 1. 4,000
68,000
6. 9,100 8. 16,000 Bal. Bal.
22,000 24,000
9. 10.
133,200 68,000
11. 2,000 Warranties Payable Retained Earnings
Bal. 7. 2,000 4. 6,400 Bal.
62,300 33,000
Bal.4,400
Accounts Receivable Dividends
Bal. 11. 2,000
20,000
3a. 5. 800 Notes Payable Bal. 2,000
128,000
9. 6. 10,000
133,200
Bal. Bal. Sales Revenue
14,000 10,000
3a.
128,000
Allow. For Doubt. Discount on Notes Bal.
Acct. Pay. 128,000
Bal. 1,000 6. 900 13. 300
5. 800 12. 1,280 Bal. 600 Cost of Goods Sold
Bal. 1,480 3b. 76,000
Bal.76,000
Merchandise
Inventory
Bal. Warranty Expense
40,000
2. 80,000 3b. 4. 6,400
76,000
Bal. Bal. 6,400
44,000
Operating Expenses
8. 16,000
7-95
Bal.16,000
Bad Debts Expense
12. 1,280
Bal. 1,280
Interest Expense
13. 300
Bal. 300
4: $128,000 x 5% = $6,400
6: $10,000 x 9% = $900
12: $128,000 x 1% =$1,280
13: $900 x 4/12 = $300
7-96
b.
Phillips Metal Company
Income Statement
0
Gross Margin 52,000
Operating Expenses
Interest Expense (300)
Net Income $28,020

Beginning Common Stock
$20,000
Ending Common Stock $24,000
Earnings
Less: Dividends (2,000)
Total Stockholders’ Equity $83,020
7-97
7-98
EXERCISE 7-14B b. (cont.)
Phillips Metal Co.

Balance Sheet
Assets
Cash $
62,300
Accounts
0
Liabilities
Accounts Payable $
22,000
Less: Discount on Notes Payable (600) 9,400
Common Stock 24,000
Equity 0
7-99
EXERCISE 7-14B b. (cont.)
Phillips Metal Co.


Activities:
0
Activities 0
Activities
Activities:
Inflow from Stock Issue 4,000
Outflow for Dividend (2,000)
Inflow from Loan 9,100
Activities
0
7-100
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 7
PROBLEM 7-15B
a.
Event Type of
Number Transaction
2005
1. Asset Source
2. Asset Exchange
3. Asset Use
2006
1. Asset Source
2. Asset Exchange
3. Asset Exchange
4a. Asset Exchange
4b. Asset Exchange
5. Asset Use
6. Asset Use
b. 2005 and 2006


Equity
2005
1. + NA + + NA + NA
3. − NA − NA + − NA
2006
1. + NA + + NA + NA
3. +− NA NA NA NA NA NA
4a.* +− NA NA NA NA NA NA
4b. +− NA NA NA NA NA + OA
5. − NA − NA + − − OA
6. − NA − NA + − NA
*Transaction 4a is the reinstatement of the previously written-off

account; 4b is the collection of the account.
7-101
PROBLEM 7-15B (cont.)
c.
J & J Company
2005
2. Cash 159,000
Cash 150,000
4. Bad Debts Expense* 2,550
Accounts
*$255,000 x 1% = $2,550
J & J Company
T-Accounts 2005
Equity
Cash Accounts Service Revenue
Receivable
2. 159,000 3. 1. 255,000 2. 1. 255,000
150,000 159,000
Bal. 9,000 Bal.96,000 Bal.
255,000
Allow. For
Accounts
4. 2,550 4. 2,550
Bal.2,550 Bal. 2,550
Operating
Expenses
7-102
3.
150,000
Bal.
150,000
7-103
d.
J & J Company
Income Statement
Expenses
Total Expenses 152,550
Net Income $102,450
Stock
Earnings
Earnings
Equity
7-104
PROBLEM 7-15B d. (cont.)
J & J Company
Balance Sheet
Assets
Cash $
9,000
Accounts
0
Liabilities $
-0-
Common Stock $ -0-
Equity 0

Activities:
Outflow for Expense (150,000)
Activities
Activities
Activities
7-105
7-106
e.
J & J Company
J & J Company
Equity
Receivable
Bal. 9,000 Bal. 96,000 2. 152,550 1. 255,000
Bal.
102,450
Allowance for
Doubtful Accounts Service Revenue
Bal.2,550 1. 255,000 Bal.
255,000
Bal. -0-
Operating
Expenses
Bal. 2.150,000
150,000
Bal. -0-
Bad Debts
Expense
Bal. 2,550 2. 2,550
Bal. -0-
7-107
PROBLEM 7-15B e. (cont.)
J & J Company
December 31, 2005
Cash $ 9,000
Accounts
Totals $105,000 $105,000
7-108
c. (2006)
J & J Company
2006
2. Cash 411,000
Accounts
4a. Accounts Receivable 600
Accounts
4b. Cash 600
Cash 126,000
6. Bad Debts Expense* 2,040
Accounts
*$408,000 x .5% = $2,040
7-109
PROBLEM 7-15B c. (cont.)
2006
J & J Company
T-Accounts 2006
Equity
Receivable
Bal. 9,000 Bal.96,000 Bal.
102,450
2. 411,000 5. 1. 408,000 2.
126,000 411,000
4b. 600 4a. 600 3. 1,800 Service Revenue
Bal. 4b. 600 1. 408,000
294,600
Bal. Bal.
91,200 408,000
Allow. For
Accounts
Bal.2,550 6. 2,040
3. 1,800 4a. 600 Bal. 2,040
6. 2,040
Bal.3,390 Operating
Expenses
5. 126,000
Bal.
126,000
7-110
PROBLEM 7-15B
d. (2006)
J & J Company
Income Statement
Expenses
Total Expenses (128,040
)
Net Income $279,960

Stock
Earnings
Earnings
Equity
7-111
PROBLEM 7-15B d. (cont.)
2006
J & J Company
Balance Sheet
As December 31, 2006
Assets
Cash $294,60
0
Accounts
0
Liabilities $
-0-
Common Stock $
-0-
Equity 0

Activities:
Outflow for Expenses (126,000
)
Activities 0
Activities
7-112
Activities
0
7-113
e. (2006)
J & J Company
J & J Company
Assets = Stockholders’ Equity
Cash Accounts Receivable Retained Earnings

Bal. Bal.91,200 Bal.
294,600 102,450
2. 128,040 1. 408,000
Bal.
382,410
Allow. For Doubtful
Accounts Service Revenue
Bal.3,390 1. 408,000 Bal.
408,000
Bal. -0-
Bad Debts Expense

Bal. 2,040 2. 2,040
Bal. -0-
Operating Expenses
Bal. 2. 126,000
126,000
Bal. -0-
7-114
PROBLEM 7-15B e. (cont.)
2006
J & J Company
December 31, 2006
Cash $294,600
Accounts
Totals $385,800 $385,800
7-115
PROBLEM 7-16B
a.
Sales on Account $300,00
0
Less: Ending Balance of Accounts (58,000)
Receivable
Collections of Accounts Receivable $242,00
0
b. Credit Sales $300,000 x 1% = $3,000 of Bad Debts Expense
c.
ACE Appliance
t
2. Cash 242,000
Accounts
d. Accounts Receivable Ending Balance $58,000

Less: Allowance for Doubtful Accounts (3,000)
Net Realizable Value of Accounts$55,000
Receivable
7-116
e.
ACE Appliance
Effect of Events on Financial Statements
Event Assets = Liab + S. Equity Rev. − Exp. = Net Inc. Cash Flows
Cash + Acct. − Allow. = NA + Ret.
Rec. Earn.
1. NA + 300,000 − NA = NA + 300,000 300,00 − NA = 300,000 NA
0
2. 242,000 + (242,000 − NA = NA + NA NA − NA = NA 242,000 OA
)
3. NA + NA − 3,000 = NA + (3,000) NA − 3,000= (3,000) NA
Totals 242,000 + 58,000 − 3,000 = -0- + 297,000 300,00 − 3,00 = 297,000 242,000
0 0
7-117
PROBLEM 7-17B
a.
No. Assets = Liabilitie + S. Rev. − Exp. =Net Inc. Cash Flows

s Equity
2005
1. + NA + NA NA NA + FA
2. +− NA NA NA NA NA − OA
3a. + NA + + NA + + OA
3b. + NA + + + + NA
3c. + NA + + NA + NA
3d. − NA − NA + − NA
6. − NA − NA + − NA
7. NA + − NA + − NA
8. − NA − NA + − − OA
Legend:
3a. Cash Sales
3b. Credit Card Sales (remember that the credit card expense
is recorded)
3c. Sales on Account
3d. Cost of Sales
7-118
b.
Byrd Company
1. Cash 500,000
Common Stock 500,000
2. Merchandise Inventory 1,200,00
0
Cash 1,200,00
0
3a. Cash 600,000
3b. Accounts Receivable - Credit 480,000
Card Co.
3c. Accounts Receivable 500,000
3d. Cost of Goods Sold 900,000
4. Cash 480,000
Accounts Receivable - Credit 480,000
Card Co.
5. Cash 400,000
7. Warranty Expense 4,500
8. Selling and Administrative Exp. 100,000
Cash 100,000
7-119
PROBLEM 7-17B b. (cont.)
Byrd Company
T-Accounts
Cash Warranties Payable Common Stock

1. 500,000 2. 7. 4,500 1. 500,000
1,200,000
3a. 8. 100,000 Bal.4,500 Bal. 500,000
600,000
4. 480,000
5. 400,000 Sales Revenue
Bal. 3a. 600,000
680,000
3b. 500,000
Accounts Receivable 3c. 500,000
3b.480,000 4. 480,000 Bal.
1,600,000
3c.500,000 5. 400,000
6. 5,000 Cost of Goods Sold
Bal. 95,000 3d.900,000
Bal.
900,000
Merchandise
Inventory
2. 3d. Bad Debts Expense
1,200,000 900,000
Bal. 6. 5,000
300,000
Bal. 5,000
Credit Card Expense
3b. 20,000
Bal. 20,000
Warranty Expense
7. 4,500
Bal. 4,500
Selling & Adm. Expenses
8. 100,000
Bal.
100,000
7-120
c.
Byrd Company
Income Statement
Sales Revenue $1,600,00
0
Operating Expenses
Bad Debts Expense $ 5,000
Selling & Adm. Expenses 100,000
Net Income $
570,500
Beginning Common Stock $ -0-
Ending Common Stock $
500,000
Earnings
Total Stockholders’ Equity $1,070,50
0
7-121
Byrd Company
Balance Sheet
Assets
Cash $680,000
Total Assets $1,075,00
0
Liabilities
Warranties Payable $ 4,500
Common Stock $500,000
Total Stockholders’ Equity 1,070,500
Total Liabilities and Stockholders’ $1,075,00
Equity 0
7-122
Byrd Company
Activities:
Inflow from Customers $1,480,00
0
Outflow for Inventory (1,200,00
0)
Activities 0
Activities
Activities:
Cash Inflow from Stock Issue 500,000
Activities
0
7-123
PROBLEM 7-18B
a.
White & Company

Equity
2006
1 + + NA NA NA NA + FA
2. + NA + + NA + + OA
3. − NA − NA + − − OA
4. NA + − NA + − NA
2007
1. + NA + + NA + + OA
2. − NA − NA + − − OA
3a. NA + − NA + − NA
3b. − − NA NA NA NA − OA,FA
7-124
PROBLEM 7-18B (cont.) b.
White & Company
2006
1. Cash 180,000
2. Cash 336,000
Cash 132,000
4. Interest Expense1 10,000
Closing Entries
5. cl. Service Revenue 336,000
cl. Retained Earnings 142,000
2007
1. Cash 984,000
Cash 416,000
3a. Interest Expense2 10,000
3b. Notes Payable 200,000
Cash 200,000
1
$20,000 x 6/12 = $10,000
2
$20,000 x 6/12 = $10,000
7-125
White & Company
cl Retained Earnings 426,000
7-126
White & Company

T-Accounts
Cash Notes Payable Retained Earnings

2006 2006 2006
1. 180,000 3. 132,000 1. 200,000 cl 142,000 cl 336,000
2. 336,000 Bal. Bal.
200,000 194,000
Bal. 2007 2007
384,000
2007 3b. cl 426,000 cl 984,000
200,000
1. 984,000 2. 416,000 Bal. -0- Bal.
752,000
3b.
200,000
Bal.752,000 Discount on Notes Service Revenue
Pay.
2006 2006
1. 20,000 4. 10,000 cl 336,000 2. 336,000
Bal. Bal. -0-
10,000
2007 2007
3a. 10,000 cl 984,000 1. 984,000
Bal. -0- Bal. -0-
Operating Expenses
2006
3.132,000 cl 132,000
Bal. -0-
2007
2.416,000 cl 416,000
Bal. -0-
Interest Expense
2006
4. 10,000 cl 10,000
Bal. -0-
2007
3a.10,000 cl 10,000
Bal. -0-
7-127
7-128
c.
White & Company
Income Statements
2006 2007
$336,000
Expenses
Operating Expenses 132,000 416,000
Interest Expense 10,000 10,000
Total Expenses (142,000) (426,000
)
Net Income $194,000 $558,000
Statements of Changes in Stockholders’ Equity
2006 2007
Beginning Common Stock $ -0- $ -0-
Plus: Stock Issued -0- -0-
Ending Common Stock -0- -0-
Beginning Retained -0- 194,000
Earnings
Plus: Net Income 194,000 558,000
Ending Retained Earnings 194,000 752,000
Total Stockholders’ $194,000 $752,000
Equity
7-129
White & Company

Balance Sheets
2006 2007
Assets
Cash $384,000 $752,000
Total Assets $384,000 $752,000
Liabilities
Notes Payable $200,000 $ -0-
Less: Discount on Notes Payable (10,000) -0-
Total Liabilities 190,000 -0-
Common Stock -0- -0-
Retained Earnings 194,000 752,000
Total Stockholders’ Equity 194,000 752,000
Total Liabilities and Stockholders’ $384,000 $752,000
Equity
7-130
White & Company

Statements of Cash Flows
2006 2007
Activities:
Inflow from Customers $336,000 $984,00
0
Outflow for Expenses (132,000) (416,00
0)
Ouflow for Interest -0- (20,000)
Net Cash Flow from Operating 204,000 548,000
Activities
Cash Flows From Investing -0- -0-
Activities
Activities:
Cash Outflow to Repay Loan (180,00
0)
Net Cash Flow From Financing 180,000 (180,00
Activities 0)
Net Change in Cash 384,000 368,000
Plus: Beginning Cash Balance -0- 384,000
Ending Cash Balance $384,000 $752,00
0
7-131
PROBLEM 7-19B
Type Common Retain Net Cash

Even of Assets Liabilitie Stock ed Incom Flow
t Event s Earnin e
gs
a. AE +− NA NA NA NA −
b. AS + NA NA + + NA
c. AE +− NA NA NA NA +
d. AS/AE +(+−) NA NA + + +
e. AS + NA NA + + +
f. AU − − NA NA NA −
g. AU − NA NA − − −
h. AS + NA NA + + +
i. AU − − NA NA NA −
j. AS + + NA NA NA +
k. AS + NA NA + + NA
l. AU − NA NA − − NA
m. CE NA + NA − − NA
n. AE +− NA NA NA NA +
o. CE NA + NA − − NA
7-132
PROBLEM 7-20B
Daniels Company
Balance Sheet
Assets
Current Assets
Cash $ 23,000
Less: Allow. for Doubtful (7,000) 106,000
Accounts
Interest Receivable 800
Prepaid Rent 14,000
Supplies 3,000
Notes Receivable 17,000
Total Current Assets $317,800
Property, Plant and Equipment
Equipment 77,000
Less: Accumulated Depreciation (38,000) 39,000
Land 50,000
Total Property, Plant and 89,000
Equipment
Liabilities and Stockholders’ Equity
Current Liabilities
Unearned Revenue 58,000
Interest Payable 3,000
Salaries Payable 12,000
Total Current Liabilities $135,000
Long-Term Liabilities
Less: Discount on Notes Payable (4,000)
Total Long-Term Liabilities 129,000
Common Stock 52,000
Retained Earnings 90,800*
Equity
*Must be computed: ($28,800 + $74,000 − $12,000 = $90,800)

7-133
Daniels Company
Income Statement

Operating Expenses
Salaries Expense $122,000
Non-Operating Items
Interest Revenue 6,000
Gain on Sale of Equipment 10,000
Total Non-Operating Items (16,000)
Net Income $ 74,000
7-134
PROBLEM 7-21B
a. T-Accounts provided for the use of the instructor.
Accounts Receivable
Bal. 30,000
Chg. Sales 170,000 Write-off 1,400
Coll 164,600
End. Bal. 34,000

Bal. 1,800
Write-off 1,400 Exp. 1,300
End. Bal. 1,700
Cash collected: $164,600

Bad Debts Expense: $1,300
Net Realizable Value: $34,000 − $1,700 = $32,300
b. Note: T-Accounts provided for the use of the instuctor.
Warranties Payable
Bal. 4,000
Cash Paid 4,600 Exp. 3,600
End. Bal. 3,000
Cash paid for warranties: $4,600
c. Note: T-Accounts provided for the use of the instructor.
Note Payable
Bal. 40,000
End. Bal. 40,000
Discount on Note Payable

Bal. 1,200
Exp. 400
End. Bal. 800
Interest recognized for the period: $400

Cash paid for interest: $-0-
Book Value of Discount Note: $40,000 − $800= $39,200
7-135
PROBLEM 7-22B
a.
The Sport Shop
General Journal
Accounts Payable 420,000
2a. Accounts Receivable 480,000
3a. Cash 240,000
4a. Accounts Receivable - Credit 172,800
Card Co.
5. Cash 526,000
6. Accounts Payable 540,000
Cash 540,000
7. Selling and Administrative 134,000
Expenses
Cash 134,000
8. Cash 172,800
Accounts Receivable - Cr. 172,800
Card Co
7-136
PROBLEM 722B a. (cont.)
The Sport Shop

General Journal
9. Cash 43,200
Accounts
Adjusting Entries
11a. Bad Debts Expense1 4,800
Accounts
11b. Interest Expense2 2,800
11c. Warranty Expense 1,800
1
$480,000 x 1% = $4,800
2
$4,800 x 7/12 = $2,800
7-137
PROBLEM 7-22B a. (cont.)
The Sport Shop

T-Accounts
Equity
Bal. Bal. Bal.
118,000 142,000 720,000
3a. 6. 6. 1. 420,000
240,000 540,000 540,000
5. 526,000 7. Bal. 22,000 Retained Earnings
134,000
8. 172,800 Bal.
108,000
9. 43,200 Warranties Payable
Bal. 11c. 1,800 Sales Revenue
426,000
Bal. 1,800 2a.
480,000
Accounts Receivable 3a.
240,000
Bal. Discount on Notes 4a.
172,000 Pay. 180,000
2a. 5. 9. 4,800 11b. 2,800 Bal.
480,000 526,000 900,000
4a. 8. Bal. 2,000
172,800 172,800
10. 7,200 Cost of Goods Sold
Bal. Notes Payable 2b.
118,800 288,000
9. 48,000 3b.
144,000
Allow. for Doubt. Acc. Bal. 4b.
48,000 108,000
Bal. Bal.
10,000 540,000
10. 7,200 11a.
4,800
Bal. 7,600 Credit Card Expense
4a. 7,200
Merchandise Bal. 7,200
Inventory
Bal.
690,000
1. 420,000 2b. Selling & Adm. Exp.
288,000
7-138
3b. 7. 134,000
144,000
4b. Bal.
108,000 134,000
Bal.
570,000
Bad Debts Expense
11a. 4,800
Bal. 4,800
Warranty Expense
11c. 1,800
Bal. 1,800
Interest Expense
11b. 2,800
Bal. 2,800
7-139
The Sport Shop

Income Statement
Operating Expenses
Bad Debts Expense $ 4,800
Selling and Admin. 134,000
Expenses
Total Operating (147,800)
Expenses
Less: Nonoperating
Expense
Net Income $209,400
Beginning Common $720,000
Stock
Earnings
Earnings
Total Stockholders’ $1,037,40
Equity 0
7-140
The Sport Shop

Balance Sheet
Assets
Cash $426,000
Accounts
Total Assets $1,107,200
Liabilities
Less: Discount on Notes Payable (2,000) 46,000
Common Stock 720,000
Total Stockholders’ Equity 1,037,400
Total Liabilities and Stockholders’ $1,107,200
Equity
7-141
The Sport Shop

Activities:
Outflow for Inventory (540,000
)
Outflow for Expenses (134,000
)
Activities 0
Activities
Activities:
Net Cash Flow From Financing 43,200
Activities
0
b. Net Realizable Value: $111,200 ($118,800 − $7,600).
c. Bad Debts Expense using Direct Write-off Method: $7,200
7-142
ATC 7-1
Financial Statement Analysis
a. First, calculate the accounts receivable turnover ratio:
$31,888÷$2,895=11.0 times
Next, calculate the average days to collect accounts receivable:
365 days÷11.0=33 days
b. Note 9, page 42, reports “allowances” of $69 (million).
Allow. for doubtful accts. ÷ Acct. Rec. = Uncollectible %
$69÷$2,964=2.3%
c. $2,895÷$9,491=30.5%
d. Note 9, page 42, reports warranty obligations of $467 (million).
7-143
ATC 7-2 a. 1.
Bell Card Zore
Total Sales $125,000 $210,000 $195,000
Cash Sales 85,000 26,000 120,000
Credit Sales 40,000 184,000 75,000
Accounts Receivable, 1/1/08 6,200 42,000 8,100
Accounts Receivable, 12/31/08 5,600 48,000 7,500
Allowance for Doubtful Acct, 1/1/08 186 1,840 405
Allowance for Doubtful Acct, 12/31/08 224 1,680 435
Bad Debts Expense, 2008 242 1,200 395
Uncollectible accounts charged off, 2008 204 1,360 365
Collections of accounts receivable, 2008 40,396 176,640 75,235
2. Uncollectible Accounts
Bell - 2007: $186 ÷ $6,200 = .03 or 3%
Bell - 2008: $224 ÷ $5,600 = .04 or 4%
Card - 2007: $1,840 ÷ $42,000 = .044 or 4.4%

Card - 2008: $1,680 ÷ $48,000 = .035 or 3.5%
Zore - 2007: $405 ÷ $8,100 = .05 or 5%

Zore - 2008: $435 ÷ $7,500 = .058 or 5.8%
3. Credit Sales
Bell: $40,000 ÷ $125,000 = 32%
Card: $184,000 ÷ $210,000 = 87.6%
Zore: $75,000 ÷ $195,000 = 38.5%
4. Accounts Receivable Turnover

Bell: $40,000 ÷ $5,600 = 7.14
Card: $184,000 ÷ $48,000 = 3.83
Zore: $75,000 ÷ $7,500 = 10
c. Card has the highest percentage of sales that are credit sales with 87.6%.
d. Zore appears to be doing the best job of collecting it accounts receivable with just .5% of
its charge sales being charged off during the year.
A company can screen its charge customers and use aggressive collection policies to
keep uncollectible accounts to a minimum.
7-144
ATC 7-3
Thinking About the Numbers -- Explaining the Time Needed to Collect Accounts Receivable
a. Retail furniture stores, such as Haverty’s, sell their products directly to consumers.
Because furniture purchases represent relatively large dollar amounts for many
individuals, they often “finance” these purchases. This is the reason Haverty’s takes
about three months on average to collect its receivables; it allows customers a long
time to pay, but it charges interest on their accounts receivable during this time.
Ford, by contrast, sells to car dealers, not to the ultimate consumer, so it gets its
money relatively fast. Ford also has a “car financing” operation, but that is a separate
operation from the manufacturing of cars.
b. The rather short collection period for Boeing will surprise many students. They may
suggest that Boeing collects its receivables soon after each airplane is manufactured
because it has been “made to order.” This, of course, is only partly true. Boeing bills
and collects payments from customers as their airplanes are being produced. If
Boeing waited until its airplanes were completed before being paid, it would need to
borrow (or get from some other source) a lot of additional money to finance the long
production period that airplanes require. Boeing’s workers and suppliers want to be
paid as they provide services to Boeing, not after each airplane is completed.
Colgate Palmolive, by contrast, has a rather traditional accounts receivable

arrangement with its distributors. The length of time they are given to repay Colgate
probably is approximately the same length of time they are expected to need to sell
the products to their customers.
7-145
ATC 7-4
a. Accounts Receivable Turnover:
Company Sales ÷ Accounts Receivable

Shafer $920,000 ÷ $80,000 = 11.5
times
Burgess $450,000 ÷ $50,000 = 9.0
times
Average Days to Collect Accounts Receivable:
Company 365 ÷ Acct. Rec. Turnover

Shager 365 ÷ 11.5 = 31.7 days to
coll.
Burgess 365 ÷ 9.0 = 40.56 days to
coll.
b. Burgess is more likely to incur a larger cost from the

extension of credit because it takes longer to collect from
customers.
c. Costs associated with the extension of credit:
1. Cost of credit approval.

2. Recording and billing costs of accounts receivable.
3. Costs associated with lost opportunities to invest the
cash to produce a return on the investment.
4. Salaries, equipment, and supplies that are used in the
collection process.
d. A company may be more willing to extend credit:
1. Because more goods and services can be sold when

credit is allowed.
2. To be more competitive with other companies.
7-146
3. To give the buying company time to generate the cash to
pay for the goods purchased.
7-147
ATC 7-5
a. First the companies' gross margins must be calculated.

Playfair Pigpen
Sales $650,000 $1,000,000
Cost of goods sold 475,000 630,000
Gross margin $175,000 $ 370,000
Gross margin %:
Playfair: $175,000 ÷ $650,000 = 26.9%
Pigpen: $370,000 ÷ $1,000,000 = 37.0%
Average days to collect receivables:
First, calculate the net realizable value of each company's accounts receivable:
Playfair Pigpen
Accounts receivable $105,000 $260,000
Allow. for doubtful accts. 5,000 10,000
Net realizable value $100,000 $250,000
Second, calculate the accounts receivable turnover ratio:

Playfair: $650,000 ÷ $100,000 = 6.5 times
Pigpen: $1,000,000 ÷ $250,000 = 4.0 times
Finally, calculate the average days to collect accounts receivable:
Playfair: 365 days÷ 6.5 = 56 days

Pigpen: 365 days÷ 4.0 = 91 days
b. Pigpen is charging more in relation to cost of goods sold.

Gross Margin %:
Playfair: $175,000÷$650,000=26.9%
Pigpen: $370,000÷$1,000,000=37.0%
c. Pigpen has the larger absolute balance of accounts receivable and it takes a longer time
to collect its accounts receivable. Therefore, it will incur the greater financing cost
associated with accounts receivable.
7-148
ATC 7-5 (cont.)
d. Based only on the information provided, Playfair probably has the more restrictive credit
policies. It is collecting its receivables faster than Pigpen. This suggests Playfair requires
repayment more quickly than Pigpen, or that it only grants credit to customers who have a
history of paying on time, or both. Of course there are many other factors, such as
industry trends, that might explain the difference in average collection periods, but this
information is not available to us. In a "real-world" situation, a prudent decision maker
would try to obtain more information before making a judgment.
7-149
ATC 7-6
This assignment is designed to test both analytical skills and writing skills.
In the memo, students should explain the conceptual difference in the two types of notes.
Some points that can be made include:
Interest-bearing note:
interest is paid at maturity;
the amount of cash proceeds equals the amount of the principal of the note;
interest is computed by multiplying the principal of the note by the interest rate.
Discount note:
interest is paid in advance;
the amount of the cash proceeds equals the face amount of the note less the amount
of discount that is deducted;
the amount of the discount is determined by multiplying the face amount of the note by
the discount rate.
The effective interest rate for each of the notes is computed as follows:
Interest-bearing note: $50,000 x 10% = $5,000 amount of interest

$5,000 ÷ $50,000 = 10% effective interest rate
Discount note: $50,000 x 9.5% = $4,750 amount of discount

$50,000 − $4,750 = $45,250 cash proceeds
$4,750 ÷ $45,250 = 10.5% effective interest rate
7-150
ATC 7-7
a. The direct write-off would affect the accounting equation as follows:
Stockholders’
Assets = Liabilities + Equity
(45,000) (45,000)
The entry to record the expense would be:
Debit Credit
Net income would be reduced by the recognition of the $45,000 of bad debts expense.
Ending retained earnings would be reduced on the statement of changes in equity.
Assets (i.e., accounts receivable) and equity (i.e., retained earnings) would be reduced on
the balance sheet. The statement of cash flows would not be affected.
b. The ethical thing to do would be to advise the bank. Because Saunders had knowledge
of the uncollectible account, he could not legally attest to the quality of the receivables. If
he lies to the bank, he is engaging in criminal fraud and may be subject to prosecution.
Remember always, it is best to avoid unethical or illegal behavior at the earliest possible
time.
7-151
ATC 7-8
Using the EDGAR Database
NOTE: This solution was accurate as of December 19, 2001. However, the EDGAR
database is subject to update at any time, so this solution will likely be “dated”
at the time you assign this case to your students.
These data are from the December 31, 2000 financial statements and dollar amounts
are in thousands.
a. Sales ÷ Accounts Rec. = A/R Turnover
$4,247,504 ÷ $538,403 = 7.9 times
365 ÷ 7.9 = 46 days
b. The balance of total accounts receivable was $559,999. (This is the sum of net
receivables [$538,403] and the balance in the “allowance” account [$21,596]).
$21,596 ÷ $559,999 = 3.9% of receivables that are not expected to be collected.
c. The liability for warranties was $59,563 (from the footnote for accrued liabilities).
d. Maytag manufactures products under the names of Jenn-Air, Magic Chef, Admiral, Norge
and Hoover.
e. Maytag’s financial statements do not disclose the amount of warranty expense, but the
footnotes do disclose the amount of warranties that are included in accrued liabilities.
Comparing the balance in the warranties liability to the amount of sales reveals that
warranty costs appeared to change little from 1999 to 2000. The supporting
computations are:
Warranties liability ÷ sales;

1999 $62,459 ÷ $4,323,673 = 1.445%
2000 $59,563 ÷ $4,247,504= 1.402%
Difference: 0.043%
7-152

Chapter 7 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Chapter 7 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

Caricato da

Copyright:

Formati disponibili

ANSWERS TO QUESTIONS - CHAPTER 7

1. Accounts receivable are the expected future receipts when a

2. The net realizable value is the amount expected to be

3. The going concern assumption is based upon the premise

4. The allowance method is a method of accounting for bad

5. The most common format for reporting accounts receivable

6. Estimating bad debts expense improves the accuracy of

8. Factors for use in estimating bad debts include:

9. Recognizing bad debts expense reduces accounts receivable

10. A write-off of an uncollectible account when the allowance

When the direct method is used, a write-off of an

11. The recovery of a bad debt when the allowance method is

12. The advantage of using the allowance method is that it

14. It is generally beneficial to accept major credit cards

16. Warranty - a promise to correct a deficiency or

17. The recognition of warranty expense reduces the amount of

18. Warranty cost is shown on the statement of cash flows when

19. At maturity, the amount due on an interest-bearing note is

20. The carrying value of a discount note is computed by

21. The effective rate of interest is higher on the discounted

Effective Interest Rate:

23. Event Effect on Accounting Equation

Issuing Discount Note Increase in Cash (asset);

Amortization of Discount Decrease in Discount on

Payment of Note at Maturity Decrease in Cash (asset);

24. Discount on Notes Payable is a contra-liability account that is

26. Average Days

b. (1) Net Income for 2004: $19,800 ($20,000 − $200)

c. (1) Net Income for 2005: $21,780 ($22,000 − $220)

Even Asset = Liab + S. R – E = Net Cash

a. Analyze the Accounts Receivable account:

b. Analyze the Allowance for Doubtful Accounts account:

Allowance for Doubtful Accounts

Note to Instructor: This information can also be shown in T-

Cash Allowance for Doubt Sales Revenue

a. 1. Allowance for Doubtful Accounts, 12/31/07:$ 4,800

b. Bad Debts Expense 2007 ($204,000 x 2%): $4,080

c. The recovery of previously written off accounts will cause

Accounts Receivable Allowance for Doubt. Accts.

3. $3,520 ($352,000 x 1%)

4. $31,680 − $3,200 = $28,480

2. $320 (the amount charged off)

3. $31,680 (the balance of accounts receivable)

Ben’s Repair Shop

Balance Sheet Income Statement Statement of

b. Net Income for 2006: $5,300

Big Elk Hunting Lodge

Balance Sheet Income Statement Statement

1. + 76,800 = NA + 76,800 80,000 − 3,20 = 76,800 NA

b. 1. Total assets: Cash $ 76,800

2. Revenue recognized: $ 80,000

3. Cash Flow from Operating Activities:$ 76,800

4. By accepting credit cards rather than allowing customers to purchase goods

c. Net Income Sales $3,450.00

The difference between net income and cash flows from

Event Account Titles Debit Credit

d. Companies can match the warranty expense with the

Cash Notes Payable Service Revenue

b. Income Reported on the Income Statement:

c. Cash Flows From Operating Activities:

1. 17,60 = 20,000 − 2,400 + NA NA − NA = NA 17,600 FA

Balance Sheet Income Statement Statement