Chapter 7 Solutions

Chapter 7: Cash and Receivables

Discussion Questions: Key Points

1. The individual who places the order should neither receive goods nor approve payment. If those duties were combined, the purchasing agent could buy goods and have them shipped to his or her home or side-business. Although kickbacks are always a risk, even with segregation of duties, this risk can be reduced with improved segregation of duties. Also, the person approving payment should not sign checks or maintain custody of the goods purchased. Checks could be written for items not received if duties are not segregated at this stage.

2. The reconciling items associated with the balance per books will require journal entries. The company preparing the bank reconciliation upon receipt of the bank statement finds out new information that its books did not reflect. Journal entries are necessary in order to bring the balance in the cash account in line with the correct cash balance. The company has no need or interest in preparing adjusting entries for the bank’s books.

3. The surest way to eliminate bad debts is to avoid extending credit to customers. Requiring customers to pay in cash before receipt of the goods would eliminate bad debts but would also reduce the potential customer base. Many businesses cannot or will not conduct business that way. So, they would be unwilling to buy from the company.

4. One of the key principles in GAAP is the matching principle. The matching principle requires an entity match expenses with the revenues they helped create. Since extending credit is essential for many businesses that wish to attract a broader customer base (see # 3 above), it follows that the expense associated with credit granting should be matched with the sales it helped generate. The allowance method attempts to do this through the estimation of the expense and establishment of an allowance at the end of the accounting period. The direct write-off method makes no such attempt. By waiting until the account is clearly uncollectible, which is often several months after the date that the goods were sold or services rendered, the expense is likely to be in a different accounting period than the revenue that was recognized.

5. Allowance for doubtful accounts appears on the balance sheet as a contra-asset. By subtracting the allowance from the gross accounts receivable balance, the company arrives at an estimate of the amount of cash they expect to collect from customers with balances as of the balance sheet date. This gives a more accurate indicator of the true amount of accounts receivable.

6. The percentage of sales method is focused on the relationship between sales and bad debts expense, both income statement items, in determining the amount of the adjusting entry to bad debts expense. The credit to the allowance account is plugged in to balance the entry. Under the aging approach, the focus is in determining the amount by which the allowance account would need to be adjusted in order to make the ending balance reflect the results of the aging of accounts receivable. Both the allowance and the accounts receivable balances are reported on the balance sheet. The debit to bad debt expense in

Waybright Kemp Financial Accounting 1e 405

the adjusting entry is again plugged in to make the entry balance. The focus is on the allowance account determined by its relationship to accounts receivable.

7. The balance in the allowance account would affect the adjusting entry when using the aging analysis approach, for reasons discussed in #6 above.

8. The net realizable value of accounts receivable does not change when an account is written off under the allowance method. The write-off involves a debit to the allowance account and a credit to the accounts receivable account being written off. Both the contra-asset and asset accounts are decreasing, causing total assets to remain the same.

9. Three accounts will be credited—the notes receivable account, interest revenue, and interest receivable. The interest receivable account was created during the process of preparing year-end adjusting entries.

10. The recession of 2009 was characterized by an unwillingness of banks to loan money. This restriction of the flow of capital sent shock waves through businesses. The contraction made it harder for companies to earn the type of revenue that they were expecting to help them to be able to pay off their debts. All of this caused accounts receivable turnover ratios to become lower than they were in previous years when cash flowed more freely.

406 Solutions Manual

Short Exercises

(5-10 min.) S 7-1

Book 1. Bank service charge

Bank 2. Deposit in transit

Book 3. Bank collection of amount due from customer

Book 4. Interest revenue on bank balance

Bank 5. Outstanding checks

(10-15 min.) S 7-2

− Bank 1. Outstanding checks

+ Bank 2. Deposits in transit

− Book 3. NSF check

+ Book 4. Bank collection of our note receivable

+ Book 5. Interest earned on bank balance

− Book 6. Bank service charge

− Book 7. Book error: We credited Cash for $200. The correct amount of the check was $2,000

+ Bank 8. Bank error: The bank decreased our account for a check written by another customer


(5-10 min.) S 7-3

MEE AUTO SERVICE

Bank Reconciliation

March 31, 2010

Bank Book

Balance, March 31 $3,900 Balance, March 31 $2,500

Add: Add:

Deposit in transit 200 Bank collection 710

4,100 Interest revenue 10

3,220

Less: Less:

Outstanding checks (900 ) Service charge (20 )

Adjusted bank balance $3,200 Adjusted book balance $3,200

Amounts agree


(5-10 min.) S 7-4

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Mar 31 Cash 10

Interest Revenue 10

Record interest earned on bank balance.

31 Miscellaneous Expense 20

Cash 20

Record bank service charge.

31 Accounts Receivable 180

Cash 180

Record NSF checks

(5-10 min.) S 7-5

AssetsCurrent Assets:

Cash $ 22,500Accounts Receivable 63,000Inventory 55,500

Total Current Assets $141,000

Computations: Cash in Bank Accounts plus Petty Cash = $500 + $22,000 = $22,500

(5-10 min.) S 7-6 Waybright Kemp Financial Accounting 1e 409

f. 1. A contra-account, related to accounts receivable, which holds the estimated

amount of uncollectible receivables

i. 2. A method of accounting for uncollectible receivables in which the company

waits until a specific customer’s account receivable is uncollectible before recording

uncollectible accounts expense

e. 3. A method of recording collection losses on the basis of estimates instead of

waiting to see which customers the company will not collect from

a. 4. The party to a credit transaction who sells goods or a service and obtains a

receivable

h. 5. A way to estimate uncollectible accounts by analyzing individual accounts

receivable according to the length of time they have been receivable

b. 6. The party to a credit transaction who makes a purchase and has a payable

d. 7. Cost to the seller of credit sales; arises from the failure to collect from credit

customers

g. 8. A method of estimating uncollectible receivables that calculates uncollectible

accounts expense based on net credit sales

(5-10 min.) S 7-7

Accounts Receivable balance at September 30:

Accounts ReceivableBal. 8,000 Collections 22,000Services on account

20,000 Write-offs 2,000

Bal. 4,000

Galvan probably does not expect to collect all $4,000 of the accounts receivable because, realistically, he knows he will most likely not be able to collect from some clients.


(5-10 min.) S 7-8

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

1. Uncollectible Accounts Expense ($400,000 .02) 8,000

Allowance for Uncollectible Accounts 8,000

Record estimate of uncollectible accounts expense for the year.

2. Balance sheet: Accounts Receivable $90,000 Less: Allowance for Uncollectible Accounts 8,000 Accounts Receivable, net $82,000


(5-10 min.) S 7-9

Journal

DATE ACCOUNTS AND EXPLANATIONS

POST

REF. Dr. Cr.

a. Accounts Receivable 600,000

Service Revenue 600,000

Record service revenue.

b. Cash 580,000

Accounts Receivable 580,000

Record collections on account.

c. Allowance for Uncollectible Accounts 15,000


Write off uncollectible accounts.

d. Uncollectible Accounts Expense ($600,000 .02)12,000




(5-10 min.) S 7-10

Journal


POST

REF. Dr. Cr.

a. Accounts Receivable 400,000

Sales Revenue 400,000

Record sales on account.

b. Cash 320,000



c. Allowance for Uncollectible Accounts 15,000



d. Uncollectible Accounts Expense 14,000



Allowance for Uncollectible AccountsWrite-offs 15,000 Bal. 6,000

Uncollectible accounts expense X = 14,000Bal. 5,000


(continued) S 7-10

Alternative solution:

Ending balance = Beginning balance – write offs + Uncollectible Accounts Expense

Where X = Uncollectible Accounts Expense, $5,000 = $6,000 - $15,000 + X $5,000 + $15,000 - $6,000 = X $14,000 = X

(5-10 min.) S 7-11

Journal


POST

REF. Dr. Cr.

2010

Dec. 31Uncollectible Accounts Expense ($3,600 – $1,300)

2,300

Allowance for Uncollectible Accounts2,300



(5-10 min.) S 7-11 continued

Computations:Required balance for Allowance for Uncollectible Accounts based on the aging schedule:

Age of Accounts

1-30 Days 31-60 Days 61-90 DaysOver

90 DaysTotal

ReceivablesAmountreceivable $70,000 $20,000 $10,000 $4,000 $104,000Estimate percentageuncollectible X 1% X 2% X 5% X 50%Required balance for Allowance for Uncollectible Accounts

$700 + $400 + $500 + $2,000 = $ 3,600

Allowance for Uncollectible Accounts

Bal. 1,300

Uncollectible accounts Expense = 2,300Bal. 3,600

(10-15 min.) S 7-12

Procedure b is the only procedure that includes an internal control weakness. The internal control weakness is the lack of separation of duties that allows the credit department to receive incoming cash receipts from customers.

With access to cash, a credit-department employee can pocket cash received from a customer and destroy the related remittance slip. The employee can then authorize the write off the customer’s account as uncollectible, and the company will stop pursuing collection from the customer.


To strengthen the controls, the company can have cash go to a lock box at the bank or to the company mailroom, not to the credit department.


(10-15 min.) S 7-13

i 1. A written promise to pay a specified amount of money at a particular future date

e 2. The date when final payment of the note is due; also called the due date.

c 3. The percentage rate of interest specified by the note for one year

g 4. The entity to whom the maker promises future payment

b 5. The period of time during which interest is earned

h 6. The amount loaned out by the payee and borrowed by the maker of the note

f 7. The sum of the principal plus interest due at maturity

d 8. The entity that signs the note and promises to pay the required amount

a 9. The revenue to the payee for loaning money; the expense to the debtor

(10-15 min.) S 7-14

Note 1: $100,000 .08 6/12 = $4,000

Note 2: $30,000 .12 75/360 = $750

Note 3: $20,000 .09 60/360 = $300

Note 4: $50,000 .10 3/12 = $1,250


(10-15 min.) S 7-15

Journal


POST

REF. Dr. Cr.

1. June 12 Note Receivable—C. Kleuters 100,000

Cash 100,000

2. Sept. 10 Cash ($100,000 + $2,000) 102,000

Note Receivable—C. Kleuters 100,000

Interest Revenue

($100,000 .08 90/360) 2,000

(5-10 min.) S 7-16

Jaxon KilbornCash $10,000 $25,000Short-term Investments 5,000 15,000Net Receivables 45,000 52,000= Total Quick Assets $60,000 $92,000÷ Current Liabilities ÷ $45,000 ÷$100,000= Quick Ratio 1.33 .92


(5-10 min.) S 7-17

Moore Noel

Net Credit Sales $73,000 $45,625

Divide by average Accounts Receivable* $12,500 $22,000

Equals accounts receivable turnover 5.8 2.1

* (Net Accounts Receivable, beginning + Net Accounts Receivable, ending)/2


Exercises

(10-15 min.) E 7-18A

Bank Book

Balance, January 31 $1,000 Balance, January 31 (c) $ 790

Add: Add:


(a) 1,600 Interest revenue 15

(d) 1,230

Less: Less:

Outstanding checks (b) (400 ) Service charge (30 )


Computations

(a) Subtotal: $1,000 Bank balance, January 31

+$ 600 Deposit in transit= $1,600 Subototal

(b) Outstanding checks: $1,600 Subtotal from part (a) −$1,200 Adjusted bank balance $ 400 Outstanding checks

(c) Balance, January 31: $1,230 Subtotal from part (d) below

− $ 425 Bank collection − $ 15 Interest revenue

$ 790 Book balance, January 31(d) Subtotal:

$1,200 Adjusted book balance + $ 30 Service charge = $1,230 Subtotal


(20-25 min.) E 7-19A

Req. 1

DIRK COLE

Bank Reconciliation

September 30, 2010

Bank Books

Balance, September 30 $1,188 Balance, September 30 $4,153

Add:

Deposit in transit 4,095

5,283 Less:

Correction of book error—

Less: Recorded $70 check

Outstanding checks as $60 (10)

No. 926 (175) Cost of checks (20)

No. 927 (1,000 ) Service charge (15 )


Cole’s account actually has cash of $4,108 on September 30.


Req. 2

Journal

DATE ACCOUNTSPOSTREF. Dr. Cr.

Sep 30 Accounts payable 10Cash 10

To correct error on check written to vendor.

30 Miscellaneous Expense 35Cash 35

Record bank service charge and cost of checks.

(20-25 min.) E 7-20A

Req.1

GODDARD PICTURE FRAMES

Bank Reconciliation

January 31, 2010

Bank Books

Balance, January 31 $1,000 Balance, January 31 $3,035

Add: Add:

Deposit in transit 2,700 EFT collection—rent 500

3,700 3,535

Less:


Less: Recorded $300 check as $30 (270)

Outstanding checks Service charge (15)

No 213 (325) Charge for printed checks (10)

No 214 (200) NSF checks (65)



Req. 2

Journal


Jan 31 Cash 500 Rental Income 500To record rental income

31 Salaries Expense 270Cash 270

To correct error on check written to pay salaries.



31 Accounts Receivable 65 Cash 65Record NSF checks

(5-10 min.) E 7-21A

Journal

DATE ACCOUNTS AND EXPLANATIONSPOSTREF. Dr. Cr.

Feb. 3 Accounts Receivable – Bill Hanson 600Sales Revenue 600


Aug. 8 Uncollectible Accounts Expense 600 Accounts Receivable – Bill Hanson 600Write off uncollectible accounts.

Nov. 10 Accounts Receivable – Bill Hanson 400 Uncollectible Accounts Expense 400Reinstate part of Bill Hanson’s account

Nov 10 Cash 400 Accounts Receivable – Bill Hanson 400Collected cash on account


(10-15 min.) E 7-22A

Req. 1

Journal


Jan. Cash 60,000Accounts Receivable 120,000

Sales Revenue 180,000Record sales.



Jan. Allowance for Uncollectible Accounts 1,200Accounts Receivable 1,200


Jan. Uncollectible Accounts Expense ($120,000 .02) 2,400Allowance for Uncollectible Accounts 2,400

Record estimate of uncollectible accounts expense for the month.

Req. 2

Accounts Receivable Allowance for Uncollectible AccountsBal. 30,000 Collections 90,000 Write-offs 1,200 Bal. 1,500Credit Sales 120,000 Write-offs 1,200 Uncollectible

accounts expense2,400

Bal. 58,800 Bal. 2,700

Net Accounts Receivable: $58,800 – $2,700 = $56,100.Rice Automotive expects to collect the net Accounts Receivable of $56,100.


(15-20 min.) E 7-23A

Req. 1

Journal


2010Dec. 31 Uncollectible Accounts Expense ($10,700 - $3,900) 6,800

Allowance for Uncollectible Accounts 6,800Record estimate of uncollectible accounts expense for the year.

Computations:

Balance needed in allowance account: ($140,000 .005) + ($80,000 .01) + ($70,000 .06) + ($10,000 .50) = $700 + $800 + $4,200 + $5,000 = $10,700 Adjusting entry amount: $10,700 balance needed – $3,900 current balance = $6,800

Allowance for Uncollectible AccountsBal. 3,900Uncollectible accounts expense

6,800Bal. 10,700

Req. 2

Journal


2010Dec. 31 Uncollectible Accounts Expense ($10,700 + $1,300) 12,000


Computations:

Balance needed in allowance account: ($140,000 .005) + ($80,000 .01) + ($70,000 .06) + ($10,000 .50) = $700 + $800 + $4,200 + $5,000 = $10,700 Adjusting entry amount: $10,700 balance needed + $1,300 current balance = $12,000

Allowance for Uncollectible AccountsBal. 1,300 Uncollectible accounts

expense12,000

Bal. 10,700


(15-20 min.) E7 -24A

Req 1

Journal


2010Dec. 31 Uncollectible Accounts Expense 2,750


Computations: ($550,000 .005) = $2,750

Req 2

Journal




Computations:

Balance needed in allowance account: $2,575 Adjusting entry amount: $2,575 balance needed - $600 current balance = $1,975


(15-20 min.) E 7-25A

Req. 1

Interest for:2010: $100,000 .06 8/12 = $4,0002011: $100,000 .06 4/12 = $2,000

Req. 2

a. Citibank has a note receivable.b. Grant Hughes has a note payable. c. Citibank has interest revenue. d. Grant Hughes has interest expense.

Req. 3

Payoff at November 30, 2010:Principal $100,000Interest $100,000 .06 7/12 = 3,500Total $103,500

(15-20 min.) E 7-26A

Journal


Apr. 1 Note Receivable—R. Simpson 20,000Cash 20,000

Record loan supported by note.

June 6 Note Receivable—Friday Corp. 3,000Sales Revenue 3,000

Record note received for goods sold.

30 Interest Receivable ($400 + $20) 420Interest Revenue 420

Accrue interest revenue.

Computations:Interest Receivable:R. Simpson: $20,000 .08 3/12 = $400Friday Corp.: $ 3,000 .10 24/360 = 20Total interest receivable at June 30 $420


(15-20 min.) E 7-27A

Req. 1

Journal


2010June 29 Accounts Receivable—I. Happy 10,000

Sales Revenue 10,000Record sale on account.

Nov. 1 Note Receivable— I. Happy 10,000Accounts Receivable—I. Happy 10,000

Record note received for account.

Dec. 31 Cash ($10,000 + $150) 10,150Note Receivable— I. Happy 10,000

Interest Revenue($10,000 .09 x 60/360) 150Record collection of note receivable.

(15-20 min.) E 7-28A

A B C DCash $ 92,000 $ 64,000 $23,000 $107,000Short-term Investments 70,000 28,000 15,000 53,000Net Receivables 125,000 110,000 52,000 140,000 = Total Quick Assets $287,000 $202,000 $90,000 $300,000÷ Current Liabilities ÷$205,000 ÷$101,000 ÷$60,000 ÷$350,000= Quick ratio 1.40 2.00 1.50 .86

Company D should be concerned because they only have $.86 of Quick Assets to pay for every $1 owed of Current Liabilities.


(15-20 min.) E 7-29ADollar amounts in thousands

Net Short-term a. Quick

=Cash + Receivables + Investments

ratio Total current liabilities

=$215 + $220 + $165 $449 + $145

=$600$594

= 1.01

A quick ratio of 1.01 is strong.

b. AccountsReceivable

=Net Credit Sales

=$1,930

Turnover Average net Accounts Receivable [($220 + $150) / 2]

= 10.4 times per year

An accounts receivable turnover ratio of 10.4 is somewhat weak relative to credit terms of net 30.

(10-15 min.) E 7-30B

Bank Book

Balance, March 31 $ 990 Balance, March 31 (c) $ 760

Add: Add:


(a) 1,670 Interest revenue 100

(d) 1,280

Less: Less:

Outstanding checks (b) (430 ) Service charge (40 )



Computations(a) Subtotal:

$990 Bank balance, March 31 + $680 Deposit in transit= $1,670 Subototal

(b) Outstanding checks: $1,670 Subtotal from part (a)

− $1,240 Adjusted bank balance $ 430 Outstanding checks

(c) Balance, March 31:$1,280 Subtotal from part (d) below

− $ 420 Bank collection− $ 100 Interest revenue

$ 760 Book balance, March 31(d) Subtotal:

$1,240 Adjusted book balance + $ 40 Service charge = $1,280 Subtotal


(20-25 min.) E 7-31B

Req. 1

DAN CRYER

Bank Reconciliation

October 31, 2010

Bank Book

Balance, October 31 $1,085 Balance, October 31 $5,404

Add:

Deposit in transit 5,285

6,370 Less:


Less: Recorded $163 check

Outstanding checks as $63 100

No. 926 117 Cost of checks 25

No. 927 984 Service charge 10


Cryer’s account actually has cash of $5,269 on October 31.

Req. 2


Journal


Oct 31 Accounts payable 100Cash 100




(20-25 min.) E 7-32B

Req. 1

SHEPPARD PICTURE FRAMES

Bank Reconciliation

November 30, 2010

Bank Book

Balance, November 30 $1,587 Balance, November 30 $3,013

Add: Add:

Deposit in transit 2,000 EFT collection—rent 750

3,587 3,763

Less:


Less: Recorded $600 check as $60 540

Outstanding checks Service charge 30

No. 213 310 Charge for printed checks 16

No. 214 180 NSF checks 80


Req. 2


Journal


Nov 30 Cash 750 Rental Income 750To record rental income

30 Accounts payable 540Cash 540




30 Accounts Receivable 80 Cash 80Record NSF Checks

(5-10 min.) E 7-33B

Journal


May 3 Accounts Receivable – Sam Martin 970Sales Revenue 970

Record sales.

Nov. 8 Uncollectible Accounts Expense 970Accounts Receivable – Sam Martin 970


Dec. 10 Accounts Receivable – Sam Martin 200 Uncollectible Accounts Expense 200Reinstate part of Sam Martin’s account

Dec 10 Cash 200Accounts Receivable – Sam Martin 200

Record receipt of cash on account


(10-15 min.) E 7-34B

Req. 1

Journal



Sales Revenue 260,000Record sales.



Jan. Allowance for Uncollectible Accounts 2,500Accounts Receivable 2,500


Jan. Uncollectible Accounts Expense ($160,000 .04) 6,400Allowance for Uncollectible Accounts 6,400


Req. 2

Accounts Receivable Allowance for Uncollectible AccountsBal. 20,000 Collections 54,000 Write-offs 2,500 Bal. 5,900Credit Sales 160,000 Write-offs 2,500 Uncollectible

accounts expense6,400

Bal. 123,500 Bal. 9,800

Net Accounts Receivable: $123,500 – $9,800 = $113,700.Ortiz Automotive expects to collect the net Accounts Receivable of $113,700.


(15-20 min.) E 7-35B

Req. 1

Journal


2010Jul. 31 Uncollectible Accounts Expense ($15,500 - $6,400) 9,100


Computations:

Balance needed in allowance account: ($175,000 .008) + ($70,000 .03) + ($60,000 .05) + ($15,000 .60) = $1,400 + $2,100 + $3,000 + $9,000 = $15,500. Adjusting entry amount: $15,500 balance needed – $6,400 current balance = $9,100.

Allowance for Uncollectible AccountsBal. 6,400Uncollectible accounts expense 9,100Bal. 15,500

Req. 2

Journal


2010Jul. 31 Uncollectible Accounts Expense ($15,500 + $500) 16,000


Computations:

Balance needed in allowance account: ($175,000 .008) + ($70,000 .03) + ($60,000 .05) + ($15,000 .60) = $1,400 + $2,100 + $3,000 + $9,000 = $15,500. Adjusting entry amount: $15,500 balance needed + $500 current balance = $16,000.

Allowance for Uncollectible AccountsBal. 500 Uncollectible accounts

expense 16,000

Bal. 15,500


(15-20 min.) E7 -36B

Req 1

Journal


2010May 31 Uncollectible Accounts Expense 5,625


Computations: ($750,000 .0075) = $5,625

Req 2

Journal




Computations:

Balance needed in allowance account: $3,120 Adjusting entry amount: $3,120 balance needed - $1,300 current balance = $1,820

(15-20 min.) E 7-37B

Req. 1

Interest for:2010: $2,000,000 .07 6/12 = $70,0002011: $2,000,000 .07 6/12 = $70,000


Req. 2

a. Nature Bank has a note receivable.b. Gary Simon has a note payable.c. Nature Bank has interest revenue. d. Gary Simon has interest expense.

Req. 3

Payoff at January 31, 2011:Principal $2,000,000Interest $2,000,000 .07 7/12 = 81,667Total $2,081,667

(15-20 min.) E 7-38B

Journal


Feb. 1 Note Receivable—C. Fadal 15,000Cash 15,000

Record loan supported by note.

April 6 Note Receivable—Lawn Pro 6,000Sales Revenue 6,000

Record service revenue provided for note receivable.

30 Interest Receivable ($375 + $16) 391Interest Revenue 391

Accrue interest revenue.

Computations:

Interest Receivable:C. Fadal: $15,000 .10 3/12 = $375Lawn Pro: $ 6,000 .04 24/360 = 16Total interest receivable at April 30 $391


(15-20 min.) E 7-39B

Req. 1

Journal


2010March 29 Accounts Receivable—Montclair, Inc. 21,000

Sales Revenue 21,000Record sale on account.

Aug. 1 Note Receivable—Montclair, Inc. 21,000Accounts Receivable—Montclair, Inc. 21,000

Record note received for account.

Sep. 30 Cash ($21,000 + $175) 21,175Note Receivable— Montclair, Inc. 21,000

Interest Revenue($21,000 .05 x 60/360) 175Record collection of note receivable.

(15-20 min.) E 7-40B

A B C DCash $ 93,000 $ 67,000 $23,000 $111,000Short-term investments

75,000 27,000 18,000 49,000Net receivables 126,000 110,000 54,000 144,000 Total quick assets $294,000 $204,000 $95,000 $304,000Current liabilities $335,000 $280,000 $35,000 $220,000Quick ratio .88 .73 2.71 1.38

Company A should be concerned because they only have $.88 of Quick Assets to pay for every $1 owed in Current Liabilities and Company B should be concerned because they only have $.73 of Quick Assets to pay for every $1 owed of Current Liabilities.


(15-20 min.) E 7-41B

Dollar amounts in millions Net Current Short-term

a. Quick=

Cash + Receivables + Investmentsratio Total Current Liabilities

=$210 + $200 + $170 $434 + $170

=$580$604

= .96

A quick ratio of .96 is strong.

b. AccountsReceivable

=Net Credit Sales

=$2,450

Turnover Average net Accounts Receivable [($200 + $110) / 2]

= 15.8/year

An accounts receivable turnover ratio of 15.8 is strong relative to credit terms of net 30.


Problems

(20-25 min.) P 7-42A

NIELSON, INC.

Bank Reconciliation

May 31, 2010

Bank Book

Balance, May 31 $ 8,300 Balance, May 31 $6,171

Add: Add:

Deposit in transit 2,037 EFT collection of rent 625

10,337 Bank collection of note

receivable 1,000

7,796

Less:

Less: NSF check 441

Outstanding checks EFT payment of insurance 340


No. 1421 200 Book error—$216 check

No. 1422 2,267 recorded as $126 90

Adjusted bank balance $ 6,900 Adjusted book balance $6,900


(20-25 min.) P7-43A

Req. 1

BLAKE’S HAMBURGER

Bank Reconciliation

October 31, 2010

Bank Books

Balance, October 31 $12,209 Balance, October 31 $11,200

Add: Add:

Deposit in transit 381 EFT—collection on account 200

Correction of bank error— Bank collection of rental

Charged our account Revenue 900

for the check of Interest revenue on bank

another company 410 Balance 16

13,000 12,316

Less:

Outstanding checks

No. 800 402

No. 802 74

No. 806 36 Less:

No. 809 161 NSF check 67





Req. 2

Journal


Oct. 31 Cash 200Accounts Receivable 200

Record EFT collection fromcustomer.

31 Cash 900Rental Revenue 900

Record rental revenue collected bybank.

31 Cash 16Interest Revenue 16

Record interest earned on bankbalance.

31 Accounts Receivable ($67 + $192) 259Cash 259

Record NSF checks returned by thebank.




(20-25 min.) P 7-44A

Req. 1

Journal


Sept. 30 Accounts Receivable 500,000Sales Revenue 500,000


30 Cash 550,000Accounts Receivable 550,000


30 Allowance for Uncollectible Accounts 7,000Accounts Receivable 7,000


30 Uncollectible Accounts Expense (500,000 .02) 10,000Allowance for Uncollectible Accounts 10,000


Accounts Receivable Allowance for Uncollectible AccountsBal. 150,000 Collections 550,000 Bal. 9,000Credit sales

500,000 Write-offs 7,000 Write-offs

7,000 Uncollectible accounts expense

10,000

Bal. 93,000 Bal. 12,000

Uncollectible Accounts ExpenseUncollectible accounts expense

10,000

Bal. 10,000

Req. 2


Journal


Sept. 30 Accounts Receivable 500,000Sales Revenue 500,000




30 Uncollectible Accounts Expense 7,000Accounts Receivable 7,000


Accounts Receivable Uncollectible Accounts ExpenseBal. 150,000 Collections 550,000 Write-offs 7,000Credit sales 500,000 Write-offs 7,000

Bal. 7,000

Bal. 93,000

Req. 3

Income statement:Allowance

MethodDirect Write-Off Method

Uncollectible Accounts Expense $10,000 $7,000

Uncollectible Accounts Expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way.

Req. 4

Balance sheet:Allowance

MethodDirect Write-Off Method

Accounts Receivable $93,000 $93,000 Less: Allowance for Uncollectible Accounts 12,000 — Accounts Receivable, net $81,000 $93,000

Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.


(15-20 min.) P 7-45A

Req. 1Allowance for Uncollectible Accounts Uncollectible Accounts Expense

Bal. 1,800 Bal. 0Write-off 600 Reinstate 600 adjustment 2,100Write-off 1,600 adjustment 2,100

Bal. 2010 2,300 2,100

Req. 2Journal


2010Jan. 17 Accounts Receivable—Abe Gomez 600

Sales Revenue 600Record sale on account.

June 29 Allowance for Uncollectible Accounts 600Accounts Receivable— Abe Gomez 600

Write off uncollectible account.

Aug. 6 Accounts Receivable— Abe Gomez 600Allowance for Uncollectible accounts 600

Reinstate account receivable.

6 Cash 200Accounts Receivable— Abe Gomez 200

Record partial collection on account.

Sept. 4 Cash ($600 – $200) 400Accounts Receivable—Abe Gomez 400

Record balance collected on account.Dec. 31 Allowance for Uncollectible Accounts 1,600

Accounts Receivable—Bernard Clark 700Accounts Receivable—Marie Montrose 300Accounts Receivable—Terry Forman 600


31 Uncollectible Accounts Expense 2,100Allowance for Uncollectible Accounts 2,100



Req. 3

Balance sheet at December 31, 2010:Current assets:

Accounts receivable $139,000Less: Allowance for uncollectible accounts 2,300Accounts receivable, net $136,700

(20-25 min.) P 7-46A

Req. 1

Note Due Date Principal + Interest = Maturity Value(1) Dec. 23, 2011 $13,000 + $1,170 ($13,000 .09 1) = $14,170(2) May 31, 2011 $12,000 + $720 ($12,000 .12 6/12) = $12,720(3) Jan. 6, 2011 $9,000 + $75 ($9,000 .10 30/360) = $ 9,075

Req. 2

Journal


2010Dec. 31 Interest Receivable ($26 + $120 + $60) 206

Interest Revenue 206

Computations:

Note (1): $13,000 .09 8/360 = $ 26Note (2): $12,000 .12 1/12 = 120Note (3): $ 9,000 .10 24/360 = 60Total interest revenue = $206

Req. 3

Journal


2011Dec. 23 Cash ($13,000 + $26 + $1,144) 14,170

Note Receivable 13,000 Interest Receivable ($13,000 .09 8/360) 26

Interest Revenue ($13,000 .09 352/360) 1,144


(20-25 min.) P 7-47A

Req. 1

Journal

DATE ACCOUNTS POSTREF. Dr. Cr.

2009Dec. 19 Note Receivable—Arnold Collins 3,000

Accounts Receivable—Arnold Collins 3,000

31 Interest Receivable ($3,000 .12 12/360) 12Interest Revenue 12

31 Interest Revenue 12Retained Earnings 12

2010Feb. 17 Cash ($3,000 + $12 + $48) 3,060

Note Receivable—Arnold Collins 3,000 Interest Receivable ($3,000 .12 12/360) 12 Interest Revenue ($3,000 .12 48/360) 48

June 1 Note Receivable—Electra Mann 10,000Cash 10,000

Oct. 31 Note Receivable—Mark Phillips 1,500 Accounts Receivable—Mark Phillips 1,500

Dec. 1 Cash ($10,000 + $550) 10,550Note Receivable— Electra Mann 10,000Interest Revenue ($10,000 .11 6/12) 550


(20-25 min.) P 7-48A

Req. 1

Dollar amounts in thousands2010 2009

Cash + Net current receivablesa. Quick

=+ ST investments

=$82 + $257 + $140 $80 + $265 + $174

Ratio Total current liabilities $680 $700

= 0.70 = 0.74

b.A/R

=Net sales

=$5,189

= 19.9$4,995

= 20.7Turnover Average A/R* $261 $241.5

*(beginning A/R + ending A/R)/2

Req. 2

MEMORANDUMDATE:TO: The Owner of Bien Taco RestaurantsFROM: Student NameRE: Changes in ratio values from 2009 to 2010

The quick ratio decreased from .74 to .70. Short-term investments and current liabilities both decreased from 2009 to 2010. Because the decrease in short-term investments was greater than that for current liabilities, the quick ratio deteriorated. The accounts receivable turnover was approximately the same at 20 times for both years. The decline in the quick ratio conveys an unfavorable impression about the company.

Student responses may vary.


(20-25 min.) P 7-49B

STENBACK, INC.

Bank Reconciliation

November 30, 2010

Bank Book

Balance, November 30 $ 9,050 Balance, November 30 $6,172

Add: Add:

Deposit in transit 2,040 EFT collection of rent 635

11,090 Bank collection of note

receivable 1,800

8,607

Less:

Less: NSF check 452

Outstanding checks EFT payment of insurance 350


No. 1421 210 Book error—$214 check

No. 1422 2,250 recorded as $124 90

Adjusted bank balance $ 7,670 Adjusted book balance $7,670


(20-25 min.) P7-50B

Req. 1

BILLY’S HAMBURGER’S

Bank Reconciliation

December 31, 2010

Bank Book

Balance, December 31 $13,002 Balance, December 31 $12,000

Add: Add:

Deposit in transit 330 EFT—collection on account 400

Correction of bank error— Bank collection of rental

Charged our account Revenue 700

for the check of Interest revenue on bank

another company 410 Balance 12

13,742 13,112

Less:

Outstanding checks

No. 800 415

No. 802 75

No. 806 34 Less:






Req. 2

Journal


Dec. 31 Cash 400Accounts Receivable 400

Record EFT collection fromcustomer.

31 Cash 700Rental Revenue 700

Record rental revenue collected bybank.

31 Cash 12Interest Revenue 12

Record interest earned on bankbalance.

31 Accounts Receivable ($60 + $205) 265Cash 265

Record NSF checks returned by the bank.




(20-25 min.) P 7-51B

Req. 1

Journal


POST

REF. Dr. Cr.Apr 30 Accounts Receivable 490,000

Sales Revenue 490,000Record sales on account.



30 Allowance for Uncollectible Accounts 6,000Accounts Receivable 6,000


30 Uncollectible Accounts Expense (490,000 .02) 9,800Allowance for Uncollectible Accounts 9,800


Accounts Receivable Allowance for Uncollectible AccountsBal. 165,000 Collections 425,000 Bal. 8,000Credit sales

490,000 Write-offs 6,000 Write-offs

6,000 Uncollectible accounts expense

9,800

Bal. 224,000 Bal. 11,800

Uncollectible Accounts ExpenseUncollectible accounts expense

9,800

Bal. 9,800

Req 2.


Journal


April. 30 Accounts Receivable 490,000Sales Revenue 490,000




30 Uncollectible Accounts Expense 6,000Accounts Receivable 6,000


Accounts Receivable Uncollectible Accounts ExpenseBal. 165,000 Collections 425,000 Write-offs 6,000Credit sales 490,000 Write-offs 6,000

Bal. 6,000

Bal. 224,000

Req. 3

Income statement:AllowanceMethod

Direct Write-Off Method

Uncollectible Accounts Expense $9,800 $6,000

Uncollectible Accounts Expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way.

Req. 4

Balance sheet:AllowanceMethod

Direct Write-Off Method

Accounts receivable $224,000 $224,000 Less: Allowance for uncollectible accounts 11,800 — Accounts receivable, net $212,200 $224,000

Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.


(15-20 min.) P 7-52B

Req. 1Allowance for Uncollectible Accounts Uncollectible Accounts Expense

Bal. 1,500 Bal. 0Write-off 800 Reinstate 800 adjustment 3,200Write-off 2,100 adjustment 3,200

Bal. 2010 2,600 3,200

Req. 2

Journal


2010Jan. 17 Accounts Receivable—Abe Gomez 800

Sales Revenue 800Record sale on account.

June 29 Allowance for Uncollectible Accounts 800Accounts Receivable— Abe Gomez 800

Write off uncollectible account.

Aug. 6 Accounts Receivable— Abe Gomez 800Allowance for Uncollectible accounts 800

Reinstate account receivable.

6 Cash 250Accounts Receivable— Abe Gomez 250

Record partial collection on account.

Sept. 4 Cash ($800 – $250) 550Accounts Receivable—Abe Gomez 550

Record balance collected on account.

Dec. 31 Allowance for Uncollectible Accounts 2,100Accounts Receivable—Brian Kemper 1,000Accounts Receivable—Marie Montrose 200Accounts Receivable—Tanya Wayne 900


31 Uncollectible Accounts Expense 3,200Allowance for Uncollectible Accounts 3,200


Req. 3454 Solutions Manual

Balance sheet at December 31, 2010:Current assets:


(20-25 min.) P 7-53B

Req. 1

Note Due Date Principal + Interest = Maturity Value(1) Oct. 23, 2011 $13,000 + $1,040 ($13,000 .08 1) = $14,040(2) Nov 30, 2010 8,000 + $147 ($8,000 .11 2/12) = 8,147(3) Nov. 21, 2010 10,000 + $150 ($10,000 .12 45/360) = 10,150

Req. 2

Journal


2010Oct. 31 Interest Receivable ($23 + $73 + $80) 176

Interest Revenue 176

Computations:Note (1): $13,000 .08 8/360 = $ 23Note (2): $8,000 .11 1/12 = 73Note (3): $ 10,000 .12 24/360 = 80Total interest revenue = $176


Req. 3

Journal


2011Oct. 23 Cash ($13,000 + $23 + $1,017) 14,040

Note Receivable 13,000 Interest Receivable ($13,000 .08 8/360) 23 Interest Revenue ($13,000 .08 352/360) 1,017

(20-25 min.) P 7-54B

Req. 1Journal

DATE ACCOUNTS POSTREF. Dr. Cr.

2009Dec. 19 Note Receivable—AVC Company 6,000

Accounts Receivable—AVC Company 6,000

31 Interest Receivable ($6,000 .12 12/360) 24Interest Revenue 24

31 Interest Revenue 24Retained Earnings 24

2010Feb. 17 Cash ($6,000 + $24 + $96) 6,120

Note Receivable—Arnold Collins 6,000 Interest Receivable($6,000 .12 12/360) 24 Interest Revenue ($6,000 .12 48/360) 96

June 1 Note Receivable—Lincoln Music 12,000Cash 12,000

Oct. 31 Note Receivable—Ying Yang Music 5,500 Accounts Receivable—Ying Yang Music 5,500

Dec. 1 Cash ($12,000 + $660) 12,660Note Receivable— Lincoln Music 12,000Interest Revenue ($12,000 .11 6/12) 660

(20-25 min.) P 7-55B456 Solutions Manual

Req. 1

Dollar amounts in thousands2010 2009

Cash + Net current receivables a. Quick

=+ ST investments

=$82 + $290 + $130 $80 + $305 + $178

Ratio Total current liabilities $780 $800

= 0.64 = 0.70

b.A/R

=Net Sales

=$5,223

= 17.6$5,039

= 18.0Turnover Average A/R* $297.5 $280.5

*(beginning A/R + ending A/R)/2

Req. 2

MEMORANDUMDATE:TO: The Owner of Perfection Taco RestaurantsFROM: Student NameRE: Changes in ratio values from 2009 to 2010

The quick ratio decreased from .70 to .64. Short-term investments and current liabilities both decreased from 2009 to 2010. Because the decrease in short-term investments was greater than that for current liabilities, the quick ratio deteriorated. The accounts receivable turnover was substantially the same at around 18 times for both years. The decline in the quick ratio conveys an unfavorable impression about the company.

Student responses may vary.


Continuing Exercise

Journal

DATE ACCOUNTS AND EXPLANATIONSPOST.REF. DEBIT CREDIT

Aug. 18 Cash 250 Accounts Receivable – J. Henderson 250

Oct. 12 Uncollectible Accounts Expense 150Accounts receivable – J. Henderson 150

Continuing Problem

Req 1

Accounts ReceivableBal 8/31 5,400September Sales 52,000Bal 9/30 57,400

Req 2

Journal

DATE ACCOUNTS AND EXPLANATIONSPOST.REF. DEBIT CREDIT

Sep 30 Uncollectible Accounts Expense * 2,870 Allowance for Uncollectible Accounts 2,870Record estimated uncollectible accounts

*$57,400 x .05 = $2,870 (Note: There was no beginning balance in Allowance for Doubtful Accounts.)

Req 3

Balance sheet at September 30, 2010:Current assets:



Ethics in Action

Case #1

Yes, Ed should provide financial statements that reflect this new information. This one

account represents a substantial amount of the total account receivable balance owed and

the fact that it will not be collected needs to be reflected in the financials.

While Ed may have supplied the bank with the original information, once he became

aware of this bankruptcy he would have a responsibility to update the old financial

information.

There are certainly ethical issues regarding new information that will have a material

impact on financial statements previously provided. In this case, the bank is basing its

lending decisions upon the financials Ed originally provided. Knowing that a $24,295

account receivable will become uncollectible may influence the lending decision, and

accordingly, it must ethically be disclosed.

The allowance method is designed for establishing an estimated allowance; given that it

was more than 90 days past due, a larger allowance was warranted. Usually banks request

an aging schedule to determine the individual customers and the various ages of the

related balances. In this case, Ed would have to disclose that the account was

uncollectible rather than 90 days past due. Also, most companies disclose individual

customers who represent unusually large account balances relative to their other

customers. This provides further insight into the possible risk exposures.

Had a relatively small account become uncollectible, the amount in the allowance

account could easily be used for the write off. Thus, there would be no material impact on

the existing financial information and the bank would not need to be notified.

Case #2

Yes, it would be unethical. Changing the percentage used when applying the allowance

method for estimating bad debt expense would be permissible if new information was

available that would require the percentage to change in order to reflect a more accurate

allowance. However, merely changing the percentage to manipulate the financial


statement disclosures to a desired result would be unethical. The financial statements

must provide reliable information for users to make informed decisions.

Again, the ethical dilemma lies in the reason for the percentage change, rather than the

percentage change itself. Merely attempting to manipulate the financial statements is not

a valid business reason for changing the percentage used. It is unlikely that they would

disclose the true reason as to why they changed the percentage amount. Further,

disclosing the fact that the percentage was changed simply to provide a higher net

income would still be unacceptable.

No “compromise” would be acceptable. The allowance method is based upon the past

experience of the business in order to provide the most reliable information for accruing

the bad debt expense and related allowance for uncollectible accounts. If the past

experience clearly supports 5% of credit sales, then that needs to be used for estimating

the bad debt expense.

If there are legitimate business reasons for reducing the current amount of bad debt

expense then it would be acceptable to reduce the 5% of credit sales amount to a lower

percentage that would better reflect the estimated uncollectible accounts. However, they

should be conservative in their estimate and thus gradually lower the rate.

By using the 1% of credit sales for the bad debt expense, the allowance for uncollectible

accounts will not be large enough to accommodate the uncollectible accounts receivable

in the next fiscal year. While they may be able to go undetected in the short run, they

cannot continue to manipulate the financial statements in the long run and they will

eventually be found out.

They should use the most accurate information available in order to provide the most

reliable financial statement disclosures.


Financial Analysis

1. The balance as of December 31, 2008 was $299,585,000. The balance as of December

31, 2007 was $300,506,000. There was a decrease of $921,000.

2. The fact that Columbia Sportswear’s accounts receivable is shown at “net” value

indicates that it uses the allowance method.

3. In Note 2 the allowance for doubtful accounts balances are provided. So, at December

31, 2008, the total accounts receivable balance was $309,127,000 ($299,585,000 net +

$9,542,000 allowance).

4. The allowance for doubtful accounts increased by $2,173,000 from $7,369,000 in 2007 to

$9,542,000 in 2008. In order to determine the amount of bad debts written off during the

year, you would need to know the amount of the provision for bad debts (bad debt

expense) that was added to the allowance account. Because this information is not

provided in the income statement, it is impossible to determine the amount of bad debts

that were written off during the year.


Industry Analysis

Accounts receivable turnover is the ratio of credit sales to average accounts receivable. It is calculated by dividing the total sales (found on the income statement) by the average accounts receivable. We have to assume that all of the sales for both companies for the year were credit sales, since we don’t know otherwise. To find the average accounts receivable, you would add the ending accounts receivable and the beginning accounts receivable (which would be the ending accounts receivable from the previous year) and divide the sum by 2. The calculation of accounts receivable turnover for the two companies would be as follows:

Columbia Sportswear:

Average accounts receivable: (ending 2008 - $299,585 + ending 2007 - $300,506) = $600,091/2 = $300,045.

Total sales for 2008 - $1,317,835 divided by average accounts receivable - $300,045 = 4.39 times.

Under Armour:

Average accounts receivable: (ending 2008 - $81,302 + ending 2007 - $93,515) = $174,817/2 = $87,408.

Total sales for 2008 - $725,244 divide by average accounts receivable - $87,408 = 8.3 times.

From the calculations above, Under Armour has the higher accounts receivable turnover. It is better to have a higher accounts receivable turnover than a lower one because that usually indicates that the accounts receivable is being collected faster. However, to really know if Under Armour is doing better by having a higher turnover ratio, we would have to compare this year’s turnover rate to last year’s turnover rate. We’re not able to do that with the data given because we don’t know what the ending accounts receivable was for 2006 to calculate average accounts receivable. However, if we assume that both companies offer a 30-day credit period, then neither company is doing very well because with 30-day credit terms, you would expect a ratio of closer to 12 (360 days divided by 30 days).


Small Business Analysis

The check that you received from Burns & Associates was returned as an NSF (not sufficient funds) check. In other words, their check bounced! So the amount of the check was removed from your checking account. In addition, your bank balance was reduced by a charge from the bank for processing the check, known as a return check charge. The last item is the normal monthly service charge imposed by the bank.

As a result of these transactions, you will have to make some journals entries. Based on the three transactions above, the journal entry would look like this:

Debit CreditAccounts Receivable - Burns & Associates, Inc. 30,200.00

Bank Service Charges 300.00

Cash 30,500.00 Record NSF check from Burns & Associates, Inc.

The journal entry above puts the amount of the returned check plus the return check charge back into accounts receivable for Burns & Associates, Inc. The logic there is that your company incurred an additional $200 expense that Burns should be responsible for paying.

If it subsequently becomes necessary to write off the entire amount due from Burns and you are using the Allowance method to account for bad debts, the journal entry would look like this:

Debit CreditAllowance for Doubtful Accounts 30,200.00Accounts Receivable – Burns & Associates, Inc. 30,200.00 Write off Burns & Associates, Inc. receivable


Written Communication

Proposed correspondence:

Mr. Burns:

I have attached a copy of your check which was returned by the bank for non-sufficient funds. I have also attached a copy of the correspondence from the bank that accompanied the check showing where they charged my account $200 for processing the returned check.

This presents several different problems for me. First of all, there is the matter of the $200 charged to my account. I would appreciate it if you could immediately reimburse me for that amount. But the second matter is of much more concern to me. You may remember that we had several discussions prior to my receipt of your check about the lateness of the payment. Now that the check has been returned, we are back in the same situation of you not having paid me, but now it is even later than when we had our last discussion.

Just as I do with all of my clients, I value your business and I wish to continue our business relationship for many years to come. However, I cannot condone late payments and certainly do not appreciate having checks bounce out of my account! If we want to continue doing business with each other, we can’t let this happen again.

Please contact me at your earliest convenience, so we can discuss the quickest way to get this matter taken care of.


Appendix:

Short Exercises

(5-10 min.) S 7A-1

Journal


Nov. 1 Petty Cash 100Cash 100

30 Postage Expense 67 Cash 67

(5-10 min.) S 7A-2

Journal


June 1 Petty Cash 200Cash 200

30 Office Supplies 104Entertainment Expense 70Cash Short 4

Cash 178

30 Petty Cash 100Cash 100


Exercises

(10-15 min.) E 7A-3A

Journal


Mar 1 Petty Cash 200Cash 200

Open the petty cash fund.

31 Delivery Expense 20Postage Expense 40Supplies Expense ($44 + $30) 74Miscellaneous Expense 16Cash Short 5

Cash 155Replenish the petty cash fund.

(10-15 min.) E 7A-4A

Journal


Mar. 31 Office Supplies 90Delivery Expense 50Cash Short 3


31 Petty Cash 100 Cash 100Increase Petty Cash fund by $100 to $250


(10-15 min.) E 7A-5B

Journal


Oct. 1 Petty Cash 220Cash 220


Oct. 31 Delivery Expense 15Postage Expense 50Supplies Expense ($43 + $10) 53Miscellaneous Expense 19Cash Short 28


(10-15 min.) E 7A-6B

Journal


April 30 Office Supplies 185Delivery Expense 40Cash Short 6


30 Petty Cash 120 Cash 120Increase Petty Cash fund by $120 to $370


Problems

10-15 min.) P 7A-7A

Req. 1

Journal


Jul 1 Petty Cash 300Cash 300


Req. 2

Journal


Jul 31 Office Supplies Expense 86Travel Expense 25Delivery Expense 17Entertainment Expense 90Cash Short 20


A difference of $20 charged to the cash short account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use.

Req. 3

Journal


Aug 1 Petty Cash ($350 − $300) 50Cash 50

Increase the petty cash fundfrom $300 to $350.

The custodian cashes the check and places $50 in currency and coin in the fund.


(10-15 min.) P 7A-8B

Req. 1

Journal


Mar 1 Petty Cash 300Cash 300


Req. 2

Journal


Mar 31 Office Supplies Expense 86Travel Expense 27Delivery Expense 10Entertainment Expense 110Cash Short 30


A difference of $30 charged to the cash short account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use.

Req. 3

Journal


April 1 Petty Cash ($375 − $300) 75Cash 75

Increase the petty cash fundfrom $300 to $375.

The custodian cashes the check and places $75 in currency and coin in the fund.
