7.9: Exercises

 

EXERCISE 7–1 (LO2)

The following transactions were made by Landers Corp. in March 2023.

Mar. 1	Established a petty cash fund of $200
12	Reimbursed the fund for the following:
	Postage	$10
	Office supplies	50
	Maintenance	35
	Meals (selling expenses)	25
		$120
18	Increased the fund by an additional $200
25	Reimbursed the fund for the following:
	Office supplies	$75
	Delivery charges	30
		$105
28	Reduced the amount of the fund to $350.

Required: Prepare journal entries to record the petty cash transactions.

EXERCISE 7–2 (LO3)

The following information pertains to Ferguson Corp. at December 31, 2023, its year-end:

Cash per company records		$5,005
Cash per bank statement		7,000
Bank service charges not yet recorded in company records		30
Note collected by bank not yet recorded in company records:
Amount of note receivable	$1,300
Amount of interest	25	1,325
Fluet inc. cheque deducted in error by bank		200
December cheques not yet paid by bank in December:
#631	$354
#642	746
#660	200
#661	300	1,600
December deposit recorded by the bank January 3, 2024		700

Required: Prepare a bank reconciliation and all necessary adjusting entries at December 31, 2023.

EXERCISE 7–3 (LO3)

The Cash general ledger account balance of Gladstone Ltd. was $2,531 at March 31, 2023. On this same date, the bank statement had a balance of $1,500. The following discrepancies were noted:

1. A deposit of $1,000 made on March 30, 2023 was not yet recorded by the bank on the March statement.
2. A customer's cheque amounting to $700 and deposited on March 15 was returned NSF with the bank statement.
3. Cheque #4302 for office supplies expense, correctly made out for $125 and cleared the bank for this amount, was recorded in the company records incorrectly as $152.
4. $20 for March service charges were recorded on the bank statement but not in the company records.
5. A cancelled cheque for $250 belonging to Global Corp. but charged by the bank to Gladstone Ltd. was included with the cancelled cheques returned by the bank.
6. There were $622 of outstanding cheques at March 31.
7. The bank collected a net amount of $290: $250 regarding a note receivable, interest revenue of $50, and a $10 service charge that also is not included in the company records.

Required: Prepare a bank reconciliation and record all necessary adjusting entries at March 31, 2023.

EXERCISE 7–4 (LO4)

Sather Ltd. had the following unadjusted account balances at December 31, 2023 (assume normal account balances):

Accounts Receivable	$147,000
Allowance for Doubtful Accounts	3,000
Sales	750,000

Required:

1. Assume that Sather Ltd. estimated its uncollectible accounts at December 31, 2023 to be two per cent of sales.
   1. Prepare the appropriate adjusting entry to record the estimated uncollectible accounts at December 31, 2023.
   2. Calculate the balance in the Allowance for Doubtful Accounts account after posting the adjusting entry.
2. Assume that Sather Ltd. estimated its uncollectible accounts at December 31, 2023 to be ten per cent of the unadjusted balance in accounts receivable.
   1. Prepare the appropriate adjusting entry to record the estimated uncollectible accounts at December 31, 2023.
   2. Calculate the balance in the Allowance for Doubtful Accounts account after posting the adjusting entry.
3. Why is there a difference in the calculated estimates of doubtful accounts in parts (a) and (b)?
4. Which calculation provides better matching: that made in part (a) or in part (b)? Why?

EXERCISE 7–5 (LO4)

The following information is taken from the records of Salzl Corp. at its December 31 year-end:

	2022	2023
Accounts written off
During 2022	$2,400
During 2023		$1,000
Recovery of accounts written off
Recovered in 2023		300
Allowance for doubtful accounts (adjusted balance)
At December 31, 2021	8,000
At December 31, 2022	9,000

Salzl had always estimated its uncollectible accounts at two per cent of sales. However, because of large discrepancies between the estimated and actual amounts, Hilroy decided to estimate its December 31, 2023 uncollectible accounts by preparing an ageing of its accounts receivable. An amount of $10,000 was considered uncollectible at December 31, 2023.

Required:

1. Calculate the amount of bad debt expense for 2022.
2. What adjusting entry was recorded at December 31, 2022 to account for bad debts?
3. Calculate the amount of bad debt expense for 2023.
4. What adjusting entry was recorded at December 31, 2023 to account for bad debts?

EXERCISE 7–6 (LO5)

Following are notes receivable transactions of Vilco Inc. whose year-end is March 31:

Mar. 1	Accepted a $40,000, 90-day, 3% note receivable dated today in granting a time extension to West Corp. on its past-due accounts receivable.
Mar. 31	Made an adjusting entry to record the accrued interest on West Corp.'s note receivable.
May 30	Received West Corp.'s payment for the principal and interest on the note receivable dated March 1.
Jun. 15	Accepted a $50,000, 45-day, 3% note receivable dated today in granting a time extension to Jill Monte on her past-due accounts receivable.
???	Received Jill Monte's payment for the principal and interest on her note dated June 15.

Required:

1. Prepare journal entries to record Vilco Inc.'s transactions (round all calculations to two decimal places).
2. Assume instead that on May 30 West Corp. dishonoured (did not pay) its note when presented for payment. How would Vilco Inc. record this transaction on May 30?

EXERCISE 7–7 (LO6,7)

The following comparative information is taken from the records of Salzl Corp. at its December 31 year-ends from 2016 to 2018:

	2023	2022	2021
Cash	$42,000	$30,000	$21,000
Accounts receivable	25,000	20,000	14,000
Merchandise inventory	36,000	25,000	17,500
Prepaid insurance	6,000	4,000	2,800
Plant and equipment	160,000	160,000	112,000
Accumulated depreciation – plant and equipment	68,000	54,000	37,800
Accounts payable	14,000	12,000	8,400
Salaries payable	9,000	8,000	5,600
Income tax payable	11,000	9,000	6,300
Bank loan, due in 3 months	17,000	0	0
Bank loan, due in 24 months	48,000	0	0
Share capital	50,000	50,000	35,000
Retained earnings	15,000	12,000	8,400
Dividends	15,000	15,000	10,500
Sales	375,000	367,000	256,900
Cost of goods sold	190,000	152,000	106,400
Operating expenses	120,000	96,000	67,200
Income tax expense	13,000	10,000	7,000

Required:

1. Calculate the acid-test and accounts receivable turnover ratios for each of 2022 and 2023 (round final calculations to two decimal places).
2. Was the change in each ratio from 2022 to 2023 favourable or unfavourable? Explain.

Problems

PROBLEM 7–1 (LO3)

The reconciliation of the cash balance per bank statement with the balance in the Cash account in the general ledger usually results in one of five types of adjustments. These are

1. Additions to the reported general ledger cash balance.
2. Deductions from the reported general ledger cash balance.
3. Additions to the reported cash balance per the bank statement.
4. Deductions from the reported cash balance per the bank statement.
5. Information that has no effect on the current reconciliation.

Required: Using the above letters a to e from the list, indicate the appropriate adjustment for each of the following items that apply to Goertzen Ltd. for December, 2023:

__________	The company has received a $3,000 loan from the bank that was deposited into its bank account but was not recorded in the company records.
__________	A $250 cheque was not returned with the bank statement though it was paid by the bank.
__________	Cheques amounting to $4,290 shown as outstanding on the November reconciliation still have not been returned by the bank.
__________	A collection of a note receivable for $1,000 made by the bank has not been previously reported to Goertzen. This includes interest earned of $50.
__________	The bank has erroneously charged Goertzen with a $1,100 cheque, which should have been charged to Gagetown Ltd.
__________	A $350 cheque made out by Fynn Company and deposited by Goertzen has been returned by the bank marked NSF; this is the first knowledge Goertzen has of this action.
__________	An $840 cheque from customer Abe Dobbs was incorrectly recorded as $730 in the company records.
__________	A $600 bank deposit of December 31 does not appear on the bank statement.
__________	Bank service charges amounting to $75 were deducted from the bank statement but not yet from the company records.

 

PROBLEM 7–2 (LO2) Petty Cash

As of August 1, 2023, Bolchuk Buildings Ltd. decided that establishing a petty cash fund would be more efficient way to handle small day-to-day reimbursements. Below is a list of transactions during August:

August 2	Prepared and cashed a $500 cheque to establish the petty cash fund for the first time.
3	Purchased some office supplies for $35.00 for immediate use.
4	Paid $20.00 for delivery charges for some merchandise inventory purchased from a supplier, fob shipping point.
6	Reimbursed an employee $139.60 for travel expenses to attend an out of town meeting.
8	Paid a delivery charge of $32.00 regarding a sale to a customer.
10	Purchased a birthday cake for all the employees having a birthday in August as part of their employee recognition program. Cost was $80.00.
14	Paid $145.00 for postage to cover postage needs for the next 6 months.
15	Checked the petty cash and realized that it needed to be replenished so a cheque was issued to replenish the fund and increase it to $800.00. Petty cash currency was counted and totalled $50.00.
17	Reimbursed an employee $75.80 for company-related travel expenses.
20	Purchased shop supplies for $300.00 to replenish shop inventory.
24	Paid $56.00 to a courier company to deliver documents to a customer.
28	Paid $345.00 to repair a broken window.
31	Cheque issued to replenish petty cash. Petty cash was counted and totalled $20.00.

Required: Prepare journal entries with dates as needed to record the items above.

PROBLEM 7–3 (LO3) Bank Reconciliation

It was time for Trevrini Co. to complete its bank reconciliation for November 30, 2023. Below is information that may relate to the task:

1. The cash balance as at November 30, 2023 was a debit balance of $23,500. The ending balance shown on the bank statement was $30,000.
2. Cheques that were outstanding at November 30 were:

   Chq 236	$230
   Chq 240	15

3. It was noted that Cheque 230 was recorded as $50 in the accounting records but was posted by the bank as $55 in error.
4. The bank statement showed a deposit of $180 for a $200 non-interest bearing note that the bank had collected on behalf of the company, net of the $20 bank service charge for collection of the note. This was not yet recorded in the company's books.
5. The bank statement showed a deduction of $1,500 for a cheque from a customer for payment on account returned NSF. Included in this charge was a $25 NSF charge.
6. The bank statement also showed a deduction of bank service charge fees of $18.
7. A deposit recorded by the company for $4,500 did not yet appear in the bank statement.

Required:

1. Prepare a bank reconciliation for the company as at November 30, 2023.
2. Prepare any necessary journal entries as a result of the bank reconciliation.

PROBLEM 7–4 (LO4)

Tarpon Inc. made $1,000,000 in sales during 2023. Thirty per cent of these were cash sales. During 2023, $25,000 of accounts receivable were written off as being uncollectible. In addition, $15,000 of the accounts that were written off in 2022 were unexpectedly collected in 2023. The December 31, 2022 adjusted balance in AFDA was a credit of $15,000. At its December 31, 2023 year-end, Tarpon had the following accounts receivable:

Age (days)	Accounts Receivable
1-30	$100,000
31-60	50,000
61-90	25,000
91-120	60,000
Over 120	15,000
Total	$250,000

Required:

1. Prepare journal entries to record the following 2023 transactions:
   1. The write-off of $25,000.
   2. The recovery of $15,000.
2. Calculate the unadjusted balance in AFDA at December 31, 2023.
3. Prepare the adjusting entry required at December 31, 2023 for each of the following scenarios:
   1. Bad debts at December 31, 2023 is based on three per cent of credit sales.
   2. Estimated uncollectible accounts at December 31, 2023 is estimated at five per cent of accounts receivable.
   3. Estimated uncollectible accounts at December 31, 2023 is calculated using the following aging analysis:

      Age (days)	Estimated Loss Percentage
      01-30	2%
      31-60	4%
      61-90	5%
      91-120	10%
      Over 120	50%

4. Calculate the December 31, 2023 adjusted balance in AFDA based on the adjustments prepared in 3(a), 3(b), and 3(c) above.

PROBLEM 7–5 (LO4) Recording Accounts Receivable Related Entries

Ripter Co. Ltd. began operations on January 1, 2022. It had the following transactions during 2022, 2023, and 2024.

Dec 31, 2022	Estimated uncollectible accounts as $5,000 (calculated as 2% of sales)
Apr 15, 2023	Wrote off the balance of Coulter, $700
Aug 8, 2023	Wrote off $3,000 of miscellaneous customer accounts as uncollectible
Dec 31, 2023	Estimated uncollectible accounts as $4,000 (1.5% of sales)
Mar 6, 2024	Recovered $200 from Coulter, whose account was written off in 2018; no further recoveries are expected
Sep 4, 2024	Wrote off as uncollectible $4,000 of miscellaneous customer accounts
Dec 31, 2024	Estimated uncollectible accounts as $4,500 (1.5% of sales).

Required:

1. Prepare journal entries to record the above transactions.
2. Assume that management is considering a switch to the balance sheet method of calculating the allowance for doubtful accounts. Under this method, the allowance at the end of 2024 is estimated to be $2,000. Comment on the discrepancy between the two methods of estimating allowance for doubtful accounts.

PROBLEM 7–6 (LO4) Recording Accounts Receivable Adjusting Entries

The following balances are taken from the unadjusted trial balance of Cormrand Inc. at its year-end, December 31, 2023:

	Account Balances
	Debit	Credit
Accounts Receivable	$100,000
Allowance for Doubtful Accounts	1,800
Sales (all on credit)	750,000
Sales Returns and Allowances		$22,000

The balance of a customer's account in the amount of $1,000 is over 90 days past due and management has decided to write this account off.

Required:

1. Record the write-off of the uncollectible account.
2. Record the adjusting entry if the bad debts are estimated to be 2% of sales.
3. Record the adjusting entry if instead, the bad debts are estimated to be 4% of the adjusted accounts receivable balance as at December 31, 2023.
4. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the December 31, 2023, balance sheet for parts (1) and (2).

PROBLEM 7–7 (LO5) Recording Short-term Notes Receivables Transactions

Below are transactions for Regal Co.:

2022
Dec 12	Accepted a $20,500, 30-day, 5% note dated this date from a customer in exchange for their past-due accounts receivable amount owing.
Dec 31	Made an adjusting entry to record the accrued interest on the Dec 12 note.
Dec 31	Closed the Interest Revenue account as part of the closing process at year-end.
2023
Jan 12	Received payment for the principal and interest on the note dated December 12.
Jan 14	Accepted a $12,000, 6%, 60-day note dated this date for a sale to a customer with a higher credit risk. Cost of goods was $7,500.
Jan 31	Made adjusting entries to record the accrued interest for January, 2023 for all outstanding notes receivable.
Feb 10	Accepted a $6,600, 90-day, 9% note receivable dated this day in exchange for his past-due account.
Feb 28	Made adjusting entries to record the accrued interest for January, 2023 regarding any outstanding notes receivable.
?	Received payment for the principal and interest on the note dated January 14.

Required:

1. Prepare the journal entries for the transactions above. Determine the maturity date of the January 14 note required for the journal entry. Round interest amounts to the nearest whole dollar for simplicity.
2. Determine the maturity date of the February 10 note.

PROBLEM 7–8 (LO5) Notes Receivables

	Note Date	Face Value	Note Term	Interest Rate	Maturity Date	Accrued Interest
						Dec 31, 2023
a)	Jan 1, 2023	$260,000	180 days	4.0%
b)	Jan 15, 2023	180,000	3 months	5.0%
c)	Jun 21, 2023	40,000	45 days	5.5%
d)	Dec 1, 2023	60,000	4 months	6.5%

Required:

1. Determine the maturity date for each note.
2. For each note, calculate the total amount of accrued interest from the note date to December 31, 2023 (the company year-end). Round interest to the nearest whole dollar.
3. What is the amount that would be collected for each note, assuming that both interest and principal are collected at maturity?

PROBLEM 7–9 (LO6) Ratio Calculations

The following information was taken from the December 31, 2022, financial statements of Stonehedge Cutters Ltd.:

	2023	2022
Sales	$250,000	$162,000
Sales discounts	52,000	2,300
Sales allowances	5,000	500
Accounts receivable	53,000	22,000

Required:

1. Calculate the accounts receivable turnover for 2023. Round answer to two decimal places.
2. If the ratio was 5.25 from 2022, has the company become more efficient or not?

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1. An expense is debited instead of Office Supplies, an asset, because the need to purchase supplies through petty cash assumes the immediate use of the items.

2. When calculating interest based on days, use 365 days per year.

3. When calculating interest based on months, use 12 months per year.

4. Short-term notes receivable from customers would be included in this amount.