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Chapter 7: Question: E7-7 (page 366)

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

Short Answer

Expert verified

The total debit and credit side of the journal is$9,500.

Step by step solution

01

Definition of Sales return and Allowances

Sales return and allowance account is a contra-revenue account reporting defective goods or defective orders returned by a customer.

02

Journal Entries

Date

Accounts and explanation

Debit $

Credit $

a

Bad debt expenses

$3,000

Allowance for doubtful accounts

$3,000

b

Bad debt expenses

$6,500

Allowance for doubtful accounts

$6,500

Working note:

1. Calculation of allowance:Allowancefordoubtfulaccounts=Accountsreceivables×Estimatedbaddebtpercentage-Creditbalanceofallowance=$100,000×5%-2000=$3,000


2. Calculation of allowance:


Allowancefordoubtfulaccounts=Accountsreceivables×Estimatedbaddebtpercentage+Debitbalanceofallowance=$10,000×5%+1500=$6,500

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Most popular questions from this chapter

(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.

1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt’s books at a cost of \(590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.

Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.

(Bank Reconciliation and Adjusting Entries) Presented below is information related to Haselhof Inc. Balance per books at October 31, \(41,847.85; receipts \)173,523.91; disbursements \(164,893.54. Balance per bank statement November 30, \)56,274.20.

The following checks were outstanding at November 30.

1224

\(1,635.29

1230

2,468.30

1232

2,125.15

1233

482.17

Included with the November bank statement and not recorded by the company were a bank debit memo for \)27.40 covering bank charges for the month, a debit memo for \(372.13 for a customer’s check returned and marked NSF, and a credit memo for \)1,400 representing bond interest collected by the bank in the name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to $1,915.40.

Instructions

(a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the information above.

(b) Prepare any journal entries required to adjust the cash account at November 30.

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

How should Moresan account for the trade accounts receivable factored on November 1, 2017? Why?

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

How should Corrs account for the sale, without recourse, of a February 1, 2017, note receivable sold on May 1, 2017? Why is it appropriate to account for it in this way?

See all solutions

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