Practice Problems

Demonstration problem

Demonstration problem A 

a. Prepare the journal entries for the following transactions:

As of the end of 2010, Post Company estimates its uncollectible accounts expense to be 1 percent of sales. Sales in 2010 were USD 1,125,000.

On 2011 January 15, the company decided that the account for John Nunn in the amount of USD 750 was uncollectible.

On 2011 February 12, John Nunn's check for USD 750 arrived.

b. Prepare the journal entries in the records of Lyle Company for the following:

On 2010 June 15, Lyle Company received a USD 22,500, 90-day, 12 percent note dated 2010 June 15, from Stone Company in payment of its account.

Assume that Stone Company did not pay the note at maturity. Lyle Company decided that the note was uncollectible.

Demonstration problem B 

a. Prepare the entries on the books of Cromwell Company assuming the company borrowed USD 10,000 at 7 percent from First

National Bank and signed a 60-day non interest-bearing note payable on 2009 December 1, accrued interest on 2009 December 31, and paid the debt on the maturity date.

b. Prepare the entries on the books of Cromwell Company assuming it purchased equipment from Jones Company for USD 5,000 and signed a 30-day, 9 percent interest-bearing note payable on 2010 February 24. Cromwell paid the note on its maturity date.

---

Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41429/mod_resource/content/15/AccountingPrinciples2.pdf
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.

Solution to demonstration problem

Demonstration problem A

a.

1.	2010	31	Uncollectible Accounts Expense (-SE)	11,250
	Dec.		Allowance for Uncollectible Accounts (-A)		11,250
			To record estimated Uncollectible accounts for the year.
2.	2011	15	Allowance for Uncollectible Accounts (+A)	750
	Jan.		Accounts Receivable-John Nunn (-A)		750
			To write off the account of John Nunn as Uncollectible.
3.		12	Accounts Receivable-John Nunn (+A)	750
			Allowance for Uncollectible Accounts (-A)		750
			To correct the write-off of John Nunn's account on January 5.
	Feb.	12	Cash (+A)	750
			Accounts Receivable-John Nunn (-A)		750
			To record the collection of John Nunn's account receivable.

 

b.

1.	2010	15	Notes Receivable (+A)	22,500
	June		Accounts Receivable-Stone Company (-A)		22,500
			To record receipt of a note from Stone Company.
2.	Sept.	13	Accounts Receivable-Stone Company (+A)	23,175
			Notes Receivable (-A)		22,500
			Interest Revenue (+SE)		675
			To record the default of the Stone Company note of $ 22,500. Interest revenue was $ 675.
		13	Allowance for Uncollectible Accounts* (+A)	23,175
			Accounts Receivable-Stone Company (-A)		23,175
			To write off the Stone Company as uncollectible.

 

*This debt assumes that Notes Receivable were taken into consideration when an allowance was established. If not, the debit should be to Loss from Dishonored Notes Receivable.

Demonstration problem B

a.

2009	1	Cash (+A)	9,883.33
Dec.		Bank Discount ($ 10,000 x 0.07 X 101 / 36) (+A)	116.67
		Notes Payable (+L)		10,000.00
	31	Interest Expense (-SE)	58.33
		Bank Discount (-A)		58.33
		($ 10,000 X 0.07 X ^/ 36)
2010	30	Notes Payable (-L)	10,000.00
Jan.		Interest Expense (-SE)	58.33
		Bank Discount (-A)		58.33
		Cash (-A)		10,000.00

 

b.

2010	2	Equipment (+A)	5,000.00
Feb	4	Notes Payable (+L)		5,000.00
Mar	2	Notes Payable (-L)	5,000.00
	6	Interest Expense (-SE)	37.5
		Cash (-A)
		($ 5,000 X 0.09 X 30/360)=$37.50		5,037.50
				675

Self-test

True-false

Indicate whether each of the following statements is true or false.

Multiple-choice

Select the best answer for each of the following questions.

1. Which of the following statements is false?

a. Any existing balance in the Allowance for Uncollectible Accounts is ignored in calculating the uncollectible accounts expense under the percentage-of-sales method except that the allowance account must have a credit balance after adjustment.

b. The percentage-of-receivables method may use either an overall rate or a different rate for each age category.

c. The Allowance for Uncollectible Accounts reduces accounts receivable to their net realizable value.

d. A write-off of an account reduces the net amount shown for accounts receivable on the balance sheet.

e. None of the above.

2. Hunt Company estimates uncollectible accounts using the percentage-of-receivables method and expects that 5 percent of outstanding receivables will be uncollectible for 2010. The balance in Accounts Receivable is USD 200,000, and the allowance account has a USD 3,000 credit balance before adjustment at year-end. The uncollectible accounts expense for 2010 will be:

a. USD 7,000.

b. USD 10,000.

c. USD 13,000.

d. USD 9,850.

e. None of the above.

3. Which type of company typically has the longest operating cycle? 

a. Service company.

b. Merchandising company.

c. Manufacturing company.

d. All equal.

4. Maxwell Company records its sales taxes in the same account as sales revenues. The sales tax rate is 6 percent. At the end of the current period, the Sales account has a balance of USD 265,000. The amount of sales tax payable is:

a. USD 12,000.

b. USD 15,000.

c. USD 15,900.

d. USD 18,000.

5. Dawson Company sells fax machines. During 2010, the company sold 2,000 fax machines. The company estimates that 5 percent of the machines require repairs under warranty. To date, 30 machines have been repaired. The estimated average cost of warranty repairs per defective fax machine is USD 200. The required amount of the adjusting entry to record estimated product warranty payable is:

a. USD 400,000.

b. USD 6,000.

c. USD 14,000.

d. USD-0-.

6. To compute interest on a promissory note, all of the following elements must be known except:

a. The face value of the note.

b. The stated interest rate.

c. The name of the payee.

d. The life of the note.

e. None of the above.

7. Keats Company issued its own USD 10,000, 90-day, non interest-bearing note to a bank. If the note is discounted at 10 percent, the proceeds to Keats are:

a. USD 10,000.

b. USD 9,000.

c. USD 9,750.

d. USD 10,250.

e. None of the above.

Check your answers on the next page. 

Self-test - Answers

True or False

1. False. The percentage-of-sales method estimates the uncollectible accounts from the net credit sales or net sales of a given period.

2. False. Uncollectible accounts expense is recognized at the end of the accounting period in an adjusting entry.

3. True. The retailer deposits the credit card invoices directly in a special checking account.

4. False. Liabilities result from a past transaction.

5. True. Current liabilities are classified into those three categories.

6. True. The note has passed its maturity date and should be removed from the Notes Receivable account. The maturity value plus any protest fee should be debited to Accounts Receivable.

7. False. Discount on Notes Payable is recorded when a non interest-bearing note is issued.

Multiple Choice

1. d. A write-off of an account receivable results in a debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable for the same amount. The net amount (accounts receivable minus allowance for uncollectible accounts) does not change.

2. a. The uncollectible accounts expense for 2010 is computed as follows:

Allowance balance after adjustment ($ 200,000 X 0.05)	$ 10,000
Balance before adjustment	(3,000)
Uncollectible accounts expense	$ 7,000

3. c. Manufacturing companies tend to have the longest operating cycle. They must invest cash in raw materials, convert these raw materials into work in process and then finished goods, sell the items on account, and then collect the accounts receivable.

4. b. USD265,0001.06=USD250,000;

USD265,000−USD250,000=USD15,000

5. c. 2,000×5 per cent=100 machines is defective.

100−30already returned =70 more expected to be returned.

70×USD 200 = USD 14,000  estimated product warranty payable.

6. c. The name of the payee is not needed to compute interest expense on a promissory note.

7. c. The proceeds from a bank are computed as follows:

Discount amount = USD 10,000×0.10×90360=USD 250

Proceeds = USD 10,000 - USD 250= USD 9,750