ACCOUNTS RECEIVABLE

Problem: 01 The information below pertaining to the Selker Companys first year of operations is to be used in testing the accuracy of Account Receivables, which has a balance of $33,000 at December 31, 2010.

a. b. c. d. e.

Collections from customers $50,000. Merchandise purchased $80,000. Ending Merchandise Inventory $20,000. Goods sell at 50% above cost. All sales are on account.

Compute the balance that A/R should show and determine the amount of any shortage or overage.

Problem: 02 Account Receivable of the Falker Manufacturing Company on December 31, 2010, had a balance of $150,000. The allowance for doubtful accounts had a $4,500 debit balance. Sales in 2010 were $11,25,000 less sales discounts taken of $9,000.

Give the adjusting entry for estimated doubtful accounts expense, assuming: a. One half of 1% of 2010 net sales will probably never be collected. b. 2% of outstanding A/R are doubtful. c. An aging schedule shows that $7,500 of the outstanding A/R are doubtful.

Problem: 03 Wille,s Gas Station had a sales of $605,000 during 2010, 30% of which were on credit. A/R outstanding at December 31, 2010, totaled $30,000 and the allowance for doubtful accounts had a $500 credit balance. Wille had cash discounts of $10,000. He also had $5,000 of merchandise returned by dissatisfied customers, 30% of which were by credit customers. Give the adjusting entries for estimating doubtful account expenses, assuming: a. 1% of net credit sales will be uncollectible. b. 2.5% of current A/R are doubtful.

Problem: 04 G.C Larsen sold Andersen Farm Machinery a used tractor and received a 90-day, 10% note for

$5,000 on May 13, 2010. On May 29, Larsen discounted the note at 11%. On August 11, the bank notified Larsen that the note was not paid and charged Larsen $10 as protest fee. On September 1, Larsen collected the note plus 12% interest from the maturity date on the account receivable balance. Record the entries for the above events on Larsens books.

Problem: 05 B. Richmond received from J. Harman, a customer, a 90-day, 12% note for $4,000, dated June 6, 2010. On July 6, Richmond had Harmans note discounted at 10% and recorded the contingent liability. The bank protested nonpayment of the note and charged the endorser with protest fees of $10 in addition to the amount of the note. On September 28, 2010, the note was collected with interest at 14% from the maturity date on the A/R balance. What entries would appear on Richmonds books as a result of the foregoing?

Problem: 06 Live Wire Electric supply Company has run into financial difficulties. It decides to improve its cash position by factoring one-third of its a/R and pledging one-half of the remaining receivables on a loan from the local bank. Details of these arrangemens were as follows: a. b. c. d. e. Account receivable at December 31, 2010 is $420,000. (Before financing) Allowance for doubtful accounts, December 31, 2010 is $3,000 (Credit) Estimated uncollectible at December 31, 2010 is 3% of A/R balance. Factoring expense is 20% of gross receivables financed. Note payable to bank is $100,000 @15% interest.

Instructions: 1. Prepare the journal entries to record the receipt of cash from (a) factoring, and (b) pledging the A/R. 2. Prepare the journal entries to record the necessary adjustment to Allowance for Doubtful Accounts. 3. Prepare the A/R section of the balance sheet as it would appear after these transactions. 4. What entry would be made on the company books of Live-Wire Electric Supply Company when factored accounts have been collected?

Problem: 07 Parco Marketing Corporation completed the following transactions, among others: May- 05 Received a $5,000, 60-day, 10% note dated May-5 from C.I. Parker, a customer. May- 24 Received a $1,800, 90-day, no interest bearing note dated May-23 from E. Silva as settlement for unpaid balance of $1,752. May-25 June-07 Had Parkers note discounted at the bank at 13%. Had Silvas note discounted at the bank at 15%.

June-25 Received from B. Avery, a customer, a $7,000, 90-day, 12% note dated June-5, payable to B. Avery and signed by the Barlow Corporation. Upon endorsement, gave the customer credit for the maturity value of the note less discount at 13%. June-29 Received a $3,500, 60-day, 9% note dated June 29 from P.L. Edwards, a customer. July-05 Received notice from the bank that Parkers note was not paid at maturity. Protest fees of $15 were charged by the bank. July-21 Received payment from Parker on the dishonored note, including interest at 16% on the A/R balance from maturity date.

Instructions: a. Give the journal entries to record the above transactions, showing contingent liabilities in the accounts. b. Give the adjusting entries required on July 31. Problem: 08 The Balance Sheet for the Ashley Cosmetic Corporation on December 31, 2009, includes the following receivable balances: Interest receivable ........................ Notes receivable $47,500 Less: N/R discounted 15,500 Account receivables Less: Allowance for d/a ... 3,950 $32,000 $90,000 $86,050 $ 325

Transaction during 2010 included the following: a. Sales on account were $767,800. b. Cash collected on accounts totaled $571,000, which included accounts of $97,000 on which cash discounts of 2% were allowed. c. Notes received in payment of accounts totaled $84,000. d. N/R discounted as of December 31, 2009, were paid at maturity with the exception of one $8,000 note on which the company had to pay $8,090, which included interest and protest fees. It is expected that recovery will be made on this note in 2012. e. Customers notes of $50,000 were discounted during the year, proceeds from their sale being $48,500. Of this total $34,500 matured during the year without notice of protest. f. Customers accounts of $8,420 were written off during the year as worthless. g. Recoveries of doubtful accounts written off in prior years were $1,020. h. N/R collected during the year totaled $26,000 and interest collected was $2,150. i. On December 31, accrued interest on N/R was $635. j. Uncollectible accounts are estimated to be 5% of the December 31, 2010, A/R balance. k. Cash of $35,000 was borrowed from the bank, accounts receivable of $42,000 being

pledged on the loan. Collection of $19,500 had been made on these receivables (included in the total given in transaction [b]) and this amount was applied on December 31, 2010, to payment of accrued interest on the loan of $500, and the balance to partial payment of the loan.

Instructions: 1. Prepare journal entries summarizing the transactions and information given above. 2. Prepare a summary of current receivables for Balance Sheet presentation.

Problem: 09 Starr Company, a wholesaler, uses the aging method to estimate bad debt losses. The following schedule of aged accounts receivable was prepaid at December 31, 210.

Age of Accounts 00 30 days 31 60 days 61 90 days 91 120 days More than 120 days Total

Amount $461,200 196,100 83,600 18,500 8,400 $767,800

The following schedule shows the year-end receivable balance and uncollectible account experience for the previous five years.

Year 2009 2008 2007 2006 2005

Year-end receivable 785,700 750,400 680,900 698,200 719,500

0-30 days 31-60 days 61-90 days 0.5% 0.4% 0.7% 0.5% 0.4% 1.0% 1.1% 1.2% 0.8% 0.9% 10.2% 9.8% 11.0% 10.1% 8.9%

91-120 days 49.1% 51.2% 51.7% 48.8% 49.2%

Over 120 day 77.6% 77.3% 79.0% 78.5% 77.6%

The unadjusted allowance for Doubtful Accounts balance on December 31, 2010, is $30,697. Instructions: Compute the correct balance for the allowance account based on the average loss experience for the last five years and prepare the appropriate end-of-year adjusting entry.

Problem: 10 The account receivable control account for the Brix Corporation shows a debit balance of $113,900. Allowance for doubtful accounts shows a credit balance of $7,600. Subsidiary ledger

detail reveals the following:

Trade account receivable (accounts pledged to secure bank loan $16,000) $24,000 Subscription receivable for common stock due in 60 days 45,000 Interest receivable on bonds 3,750 Installment receivable due 1-18 months hence (including unearned finance charge of $1,000) 6,000

Trade receivables from officers, due currently 800 Customers accounts reporting credit balances arising from sales returns 250 Advance payments to creditors on purchase orders 7,500 Advance payments to creditors on orders for machinery 12,000 Customers accounts reporting credit balances arising from advance payments 1,500 Accounts known to be worthless 900 Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) Advances to affiliated companies 700 15,000

Show how this information would be reported on the balance sheet.

Mahmodur Rahman. Department of Finance & Banking. University Chittagong. E-mail: r.mahmudcu@gmail.com Mobile: 01710-220992.