ACC-305 Week 3 - P7-10, P7-14

ACC 305 Intermediate Accounting I

Ashford University

Please use this guide for practice and preparation

Good Luck for Success.

P7-10 (Page 388) - Evergreen Company

Evergreen Company sells lawn and garden products to wholesalers. The company’s fiscal year-end is
December 31. During 2011, the following transactions related to receivables occurred:

Required:

1. Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions
involving the sale of merchandise, ignore the entry for the cost of goods sold (round all calculations to
the nearest dollar).

2. Prepare any necessary adjusting entries at December 31, 2011. Adjusting entries are only
recorded at year- end (round all calculations to the nearest dollar).

3. Prepare a schedule showing the effect of the journal entries in requirements 1 and 2 on 2011
income before taxes.

See Below for answers:

Problem 7-10
Requirement 1

February 28, 2011

Note receivable............................................................... 10,000
Sales revenue.............................................................. 10,000

March 31, 2011

Note receivable (face amount)........................................... 8,000
Discount ($8,000 x 10%)............................................... 800
Sales revenue (difference)............................................. 7,200

April 3, 2011
Accounts receivable........................................................ 7,000
Sales revenue.............................................................. 7,000

April 11, 2011

Cash (98% x $7,000).......................................................... $6,860
Sales discounts (2% x $7,000)........................................... 140
Accounts receivable.................................................... 7,000

April 17, 2011

Sales returns.................................................................... 5,000
Accounts receivable.................................................... 5,000
Inventory......................................................................... 3,200
Cost of goods sold...................................................... 3,200

April 30, 2011

Cash (99% x $50,000)......................................................... 49,500
Loss on sale of receivables (1% x $50,000)....................... 500
Accounts receivable.................................................... 50,000

To accrue interest on note receivable for four months.

June 30, 2011

Interest receivable........................................................... 333
Interest revenue ($10,000 x 10% x 4/12).......................... 333

To record discounting of note receivable.

June 30, 2011

Cash (proceeds determined below)....................................... 10,266
Loss on sale of note receivable (to balance)...................... 67
Interest receivable (from adjusting entry)........................ 333
Note receivable (face amount)....................................... 10,000

$10,000 Face amount

583 Interest to maturity ($10,000 x 10% x 7/12)
 10,583 Maturity value
(317) Discount ($10,583 x 12% x 3/12)

$10,266 Cash proceeds

August 31, 2011 — NO ENTRY REQUIRED

Requirement 2

To accrue nine months' interest on the Maddox Co. note receivable.

Discount ......................................................................... 600

Interest revenue ($8,000 x 10% x 9/12)............................ 600

Requirement 3
Income

Date increase (decrease)

February 28 $10,000

March 31 7,200

April 3 7,000

April 11 (140)

April 17 (5,000)

April 17 3,200

April 30 (500)
 June 30 333

June 30 (67)

December 31 600

Total effect $22,626

P7-14 (Page 389) -El Gato Painting Company (also see included excel file)

El Gato Painting Company maintains a checking account at American Bank. Bank statements are
prepared at the end of each month. The November 30, 2011, reconciliation of the bank balance is as
follows:

Required:

1. Prepare a bank reconciliation for the El Gato checking account at December 31, 2011.

2. Prepare any necessary adjusting journal entries indicated.

See Below for Answers:

Also see Attached excel file

Problem 7-14
Requirement 1

Step 1: Bank Balance to Corrected Balance

Balance per bank statement $3,851

Add: Deposits outstanding 2,150 (1)
Deduct:
Bank error - deposit incorrectly
credited to company account (1,300)
 Outstanding checks (831) (2)
Corrected cash balance $3,870

Step 2: Book Balance to Corrected Balance

Balance per books $4,422

Deduct:
Error in recording check #411 (90)
Service charges (22)
NSF checks (440)
Corrected book balance $3,870

(1) Receipts $42,650

Less: December receipts deposited:
Bank deposits $43,000
Less: Deposit error (1,300)
Less: Prior month's
deposits outstanding (1,200) 40,500
Deposits outstanding, Dec. 31 $ 2,150

(2) Dec. disbursements $41,853

Error in recording check #411 90
Less: December checks cleared:
Total checks cleared $41,918
Prior month's checks:
#363 $123
#380 56
#381 86
#382 340 (605) (41,313)
December checks outstanding 630
Add: check # 365 201
Total checks outstanding, Dec. 31 $ 831

Problem 7-14 (concluded)

Requirement 2
To record credits to cash revealed by the bank reconciliation.
Advertising expense........................................... 90
Miscellaneous expense (bank service charges).. 22
Accounts receivable (NSF checks).................... 440
Cash................................................................ 552

ACC-305 Week 3 - P7-10, P7-14

ACC 305 Intermediate Accounting I
Ashford University

Please use this guide for practice and preparation

Good Luck for Success.