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Chapter 8: Q8RQ (page 465)
What occurs when a business pledges its receivables?
Answer
The business entity sells the receivable to the finance company under pledge.
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At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:
a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, \)135,000.
c. Write-offs of uncollectible receivables, $2,300.
Requirements
1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance method.
2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as 10% of accounts receivable. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet
At September 30, 2018, the accounts of Green Terrace Medical Center (GTMC)
include the following:
Accounts Receivable \( 145,000
Allowance for Bad Debts (credit balance) 3,500
During the last quarter of 2018, GTMC completed the following selected transactions:
• Sales on account, \)450,000. Ignore Cost of Goods Sold.
• Collections on account, \(427,100
• Wrote off accounts receivable as uncollectible: Regan, Co., \)1,400; Owen Reis, \(800;
and Patterson, Inc., \)700
• Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts
1–30 Days 31–60
Days
61–90
Days
Over 90
Days
Accounts Receivable \( 104,000 \) 39,000 \( 14,000 \) 8,000
Estimated percent uncollectible 0.3% 3% 30% 35%
Requirements
1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.
Journalize the transactions (omit explanations) and post to the two accounts.
2. Show how Green Terrace Medical Center should report net accounts receivable on
its December 31, 2018, balance sheet.
Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office manager, is designing the internal control system. Regal proposes the following procedures for credit checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:
• The credit department runs a credit check on all customers who apply for credit. When an account proves uncollectible, the credit department authorizes the write off of the accounts receivable.
• Cash receipts come into the credit department, which separates the cash received from the customer remittance slips. The credit department lists all cash receipts by customer name and amount of cash received.
• The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting department for posting to customer accounts.
• The controller compares the daily deposit slip to the total amount posted to customer accounts. Both amounts must agree.
Recall the components of internal control. Identify the internal control weakness in this situation, and propose a way to correct it.
Why must companies record accrued interest revenue at the end of the accounting period?
Question:
Journalizing note receivable transactions including a dishonored note
On September 30, 2018, Team Bank loaned $94,000 to Kendall Warner on a one-year, 6% note. Team’s fiscal year ends on December 31.
Requirements
1. Journalize all entries for Team Bank related to the note for 2018 and 2019.
2. Which party has a
a. note receivable?
b. note payable?
c. interest revenue?
d. interest expense?
3. Suppose that Kendall Warner defaulted on the note. What entry would the Team record for the dishonored note?
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