E8-1.

BeginningAR
Credit sales
Ending AR

Accounts Receivable
$80,000
$1,000
X
35,000
$74,000

Accounts written off

Cash collected

$80,000 + X - $1,000 - $35,000 = $74,000

X = $30,000 = credit sales
Credit sales
Cash sales
Gross sales
E8-3.

$30,000
30,000
$60,000

1. The current ratio [$30,000/$10,000 = 3:1] does not change as a result of

the write-off to the allowance account. Accounts receivable and its contra
account, allowance for doubtful accounts are reduced by the same amount
[$100]. Thus, accounts receivable (net), which is the number used in
computing the current ratio, does not change.
b. X equals Y

2. Net accounts receivable[prior: $3,300 $300 = $3,000] does not change

as a result of the write-off to the allowance account [after: $3,200 $200 =
$3,000]. When the $100 account is written off, accounts receivable and
allowance for doubtful accounts are reduced by the same amount. Thus net
receivables are the same before and after the write-off.
b. X equals Y

3. Gross accounts receivable will be lower after the write-off than before the
write-off because accounts receivable is credited for the $100 uncollectible
account that is written-off [$3,300 $100 = $3,200].
a. X greater than Y
E8-4.

Requirement 1:

Accounts written off

Allowance for doubtful accounts

$1,450
Beginning balance
1,500
Provision for bad debts
$1,800
X
Additional provision for bad debts
$1,600
Ending Balance

$1,450 + $1,500 - $1,800 + X = $1,600

X = $450
1

Total bad debt provision for the year ended December 31, 2014 should be:
Provision for bad debts [$150,000 x 1%]
Additional provision for bad debts
Total bad debt provision
Requirement 2:
To record the original provision for bad debts
DR Bad debt provision
CR Allowance for doubtful accounts
To record the write-off of bad debts
DR Allowance for doubtful accounts
CR Accounts receivable
To record the additional provision for bad debts
DR Bad debt provision
CR Allowance for doubtful accounts

$1,500
450
$1,950

$ 1,500
$1,500
$ 1,800
$1,800
$ 450
$450

E8-7. Requirement 1:
Calculation of the present value of Fletchers note at a 10% effective
rate of interest:
Present value of $200,000 principal repayment in 5 years at 10%
$200,000
x
.62092
=
$124,184
Present value of five interest payments of $12,000
($200,000 x .05) each at 10%:
Year 1
$10,000
x
.90909
=
9,091
Year 2
$10,000
x
.82645
=
8,265
Year 3
$10,000
x
.75132
=
7,513
Year 4
$10,000
x
.68301
=
6,830
Year 5
$10,000
x
.62092
=
6,209
Total present value of note
$162,092
DR Notes receivable
CR Sales revenue
Requirement 2:
DR Cash
DR Note receivable
CR Interest revenue [$162,092 x 10%]

$162,092
$162,092
$10,000
6,209
$16,209
2

Requirement 3:
The difference between interest revenue and cash received increases the
carrying amount of the note receivable which will total $200,000 at
maturity.
Requirement 4:
Calculation of the present value of Fletchers note at a 12% effective
rate of interest:
Present value of $200,000 principal repayment in 4 years at 12%
$200,000
x
.63552
=
$127,104
Present value of four remaining interest payments of
$12,000 ($200,000 x .05) each at 12%:
Year 1
$10,000
x
.89286
=
8,929
Year 2
$10,000
x
.79719
=
7,972
Year 3
$10,000
x
.71178
=
7,118
Year 4
$10,000
x
.63552
=
6,355
Total present (carrying) value of note @ 12/31/2014
$157,478
Requirement 5:
DR Unrealized loss on note receivable
$10,823
CR Fair value adjustment - note receivable

$10,823

[$162,092 initial balance + $6,209 amortization] $157,478 fair value=

$10,823
E8-9.

Accounts receivable
Beginning balance
$ 750,000
Credit sales for 2014 3,100,000 $ 45,000 Accounts written off
during 2014
2,400,000 Collections from
customers during 2014
Ending balance

So, $750,000 + $3,100,000 - $45,000 - $2,400,000 = X

X = $1,405,000
Given the factors recent offer, fair value can be established at 94% of
the ending account balance or $1,320,700 = [$1,405,000 x 94%].
3

Because this offer was to purchase the receivables without recourse,

the balance in the allowance for doubtful accounts can be ignored (i.e.,
the factors offer represents the net value of the receivables).
E8-13.Requirement 1:
DR Due from factor ($17,500 $7,000 fee)
($7,000=$175,000 x 4%)
DR Allowance for doubtful accounts
DR Loss on sale of receivables (plug)
DR Cash ($175,000 x 90%)
CR Accounts receivable
CR Recourse liability
Requirement 2:
DR Recourse liability
DR Cash ($10,500 - $2,500)
CR Due from factor
CR Loss on sale of receivables (plug)
(or Gain on sale if received in a subsequent year)

$ 10,500
3,000
8,000
157,500
$175,000
4,000
$4,000
8,000
$10,500
1,500