Académique Documents
Professionnel Documents
Culture Documents
Exercises
Estimated
Time in
Minutes
Level
1
2
13*
10
25
5
Mod
Mod
Easy
20
Mod
15
Mod
20
Mod
6
7
8
9
10
13*
15
10
30
30
30
5
Mod
Easy
Mod
Mod
Mod
Easy
11
12
13*
5
5
5
Easy
Mod
Easy
7-1
7-2
Learning Outcomes
Problems
and
Alternates
Estimated
Time in
Minutes
Level
1
2
8*
30
15
20
Mod
Mod
Mod
30
Mod
8*
20
Mod
15
Mod
5
6
25
20
Mod
Mod
45
Diff
Learning Outcomes
Cases
Estimated
Time in
Minutes
7-3
Level
1
2*
4*
30
25
25
Mod
Mod
Mod
25
Mod
25
Mod
4*
25
Mod
2*
25
Mod
7-4
QUESTIONS
1. The allowance method of accounting for bad debts tries to match one of the costs
associated with granting credit, i.e., uncollectible accounts, with the revenue of the
period. Under the matching principle, an estimate of bad debts is made on the basis
of either the sales of the period or the accounts receivable at the end of the period,
and an expense is recognized.
2. When bad debts expense is estimated by using the percentage of accounts
receivable approach, the balance already in the allowance account must be
considered. For example, if the estimate of the accounts receivable that will prove to
be uncollectible is $20,000 and the allowance account has a balance of $3,000
before adjustment, only $17,000 has to be added to it. Under the percentage of net
credit sales approach, however, the emphasis is on the debit to bad debts expense.
The balance in the allowance account before adjustment is ignored.
3. An aging schedule is a refinement of the percentage of accounts receivable
approach to estimating bad debts. The accountant categorizes the various
receivables by the length of time they are outstanding. The estimate of the percent
uncollectible increases as the age of the accounts go up.
4. A note receivable arises from a written promise by someone to pay a specific
amount of money in the future with interest. An account receivable arises from
granting a customer an open line of credit and does not normally include interest.
5. When a note receivable is discounted with recourse, it means that if the customer
fails to pay the bank the total amount due on the maturity date, the company that
sold the note to the bank is liable to the bank for the full amount. Therefore, during
the time a discounted note is outstanding, the seller of the note is contingently liable.
Accounting standards do not require the seller to recognize the contingency as a
liability, but a note is required to alert the statement reader of the uncertainty.
6. The first CD should be classified as a cash equivalent because it has an original
maturity of three months or less. The second CD is classified as a short-term
investment. It is a current asset because it will be converted into cash within the next
year, even though its original maturity of more than three months disqualifies it from
classification as a cash equivalent.
7. Shares of common stock could be classified as either current assets or noncurrent
assets. The intent of the company determines the proper classification. If Stanzel
purchases the IBM shares with the intent of selling them in the near term, they
should be classified as current assets. Otherwise, the shares should be classified as
noncurrent assets.
8. Any fees or commissions paid to purchase stock in another company should be
added to the cost of the investment.
7-5
BRIEF EXERCISES
BRIEF EXERCISE 7-1 ACCOUNTING FOR BAD DEBTS
LO 1
Liabilities
10,000
10,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debts
Expense
(10,000)
(10,000)
LO 2
LO 3
2008
Dec. 31
Interest Receivable
Interest Revenue
To record interest earned: $50,000 6% 60/360.
500
500
Note: Solution assumes Gopher accepted the note, not issued the note as shown in the
text.
BALANCE SHEET
Assets
Interest
Receivable
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest Revenue
750
750
7-6
LO 4
July 20
Cash
9,600
Collection Fee Expense
400
Sales Revenue*
*Accounts Receivable if sale was already recorded.
To record credit card sales.
BALANCE SHEET
Assets
Cash
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
9,600
Collection Fee
Expense
Sales Revenue
(400)
10,000
LO 5
March 5 Cash
Investment in Stock
Gain on Sale of Stock
To record sale of stock at a gain.
BALANCE SHEET
Assets
Cash
Investment
in Stock
LO 6
10,000
=
12,300
Liabilities
12,300
10,100
2,200
INCOME STATEMENT
2,200
(10,100)
7-7
EXERCISES
EXERCISE 7-1 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE
METHODS OF ACCOUNTING FOR BAD DEBTS
LO 1
LO 1
Assets
Allowance for
Doubtful
Accounts
Liabilities
16,680
16,680
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debts
Expense
(16,680)
(16,680)
7-8
16,606
16,606
$19,206 (cr)
2,600 (cr)
$16,606 (cr)
BALANCE SHEET
Assets
Allowance for
Doubtful
Accounts
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debts
Expense
(16,606)
(16,606)
2. a. No change.
b. 2008
Dec. 31
Assets
Allowance for
Doubtful
Accounts
LO 2
Liabilities
21,806
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debts
Expense
(21,806)
(21,806)
7-9
Grocery wholesalers
Grocery chains
Institutional food services
LO 3
Notes Receivable
Accounts Receivable
To record receipt of six-month, 7% promissory
note in exchange for open account.
BALANCE SHEET
Assets
Notes
Receivable
Accounts
Receivable
Dec. 31
Liabilities
45,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
45,000
(45,000)
Interest Receivable
Interest Revenue
To record interest earned: $45,000 7% 4/12.
BALANCE SHEET
Assets
Interest
Receivable
45,000
=
1,050
Liabilities
1,050
1,050
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest
Revenue
1,050
7-10
2009
Mar. 1
Cash
Interest Receivable
Interest Revenue
Notes Receivable
To record collection of promissory note:
$45,000 7% 2/12.
BALANCE SHEET
Assets
Cash
Interest
Receivable
Notes
Receivable
LO 4
Liabilities
46,575
1,050
525
45,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
46,575
Interest Revenue
525
(1,050)
(45,000)
June 12 Cash
Accounts ReceivableAmerican Express
Sales Revenue
To record weekly cash and credit sales.
BALANCE SHEET
Assets
Cash
Accounts
Receivable
American
Express
Liabilities
2,430
3,500
5,930
INCOME STATEMENT
2,430
Sales Revenue
3,500
June 15 Cash
Collection Fee Expense
Accounts ReceivableAmerican Express
To record weekly drafts from credit card company.
BALANCE SHEET
Assets
Cash
Accounts
Receivable
American
Express
5,930
=
3,360
Liabilities
3,360
140
3,500
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Collection Fee
Expense
(3,500)
(140)
7-11
LO 5
2008
May 31
Short-Term Investments: CD
Cash
To record purchase of 120-day 9% CD.
BALANCE SHEET
Assets
Liabilities
50,000
50,000
INCOME STATEMENT
Short-Term
Investments:
CD
50,000
Cash
(50,000)
Liabilities
375
INCOME STATEMENT
375
375
Sept. 28 Cash
Interest Receivable
Interest Revenue
Short-Term Investments
To record redemption of $50,000 CD:
$50,000 9% 90/360 = $1,125.
BALANCE SHEET
Assets
Cash
Interest
Receivable
Short-Term
Investments
375
=
51,500
(375)
(50,000)
Liabilities
51,500
375
1,125
50,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest Revenue 1,125
7-12
LO 5
1. STI
6. STI
2. STI
7. STI
3. STI
8. LTI
4. CE
9. STI
5. LTI
10. CE
EXERCISE 7-8 PURCHASE AND SALE OF BONDS
LO 5
1. Journal entries
2008
Jan. 1
Assets
Liabilities
100,000
100,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Investment in
Northern Lights
Bonds
100,000
Cash
(100,000)
June 30 Cash
Interest Income
To record interest income on Northern
Lights bonds: $100,000 8% 6/12.
BALANCE SHEET
Assets
Cash
Liabilities
Interest Income
BALANCE SHEET
Cash
INCOME STATEMENT
Cash
Interest Income
To record interest income on Northern
Lights bonds.
Assets
=
4,000
4,000
4,000
Dec. 31
4,000
Liabilities
4,000
4,000
4,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest Income
4,000
2009
Jan. 1
Cash
Investment in Northern Lights Bonds
Gain on Sale of Bonds
To record sale of Northern Lights
bonds at 102.
BALANCE SHEET
Assets
Liabilities
7-13
102,000
100,000
2,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Cash
102,000
Investment in
Northern Lights
Bonds
(100,000)
Gain on Sale
of Bonds
2,000
2. Starship was able to sell the bonds for more than the bonds will pay when they
mature because the bonds carry a higher periodic interest than the market rate of
interest that was in effect at the time of the sale.
EXERCISE 7-9 INVESTMENT IN STOCK
LO 5
2008
Oct. 1
Assets
Liabilities
41,000
41,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Investment in Denver
Preferred
Stock
41,000
Cash
(41,000)
Oct. 20
Cash
1,000
Dividend Income (IS)
1,000
To record $1 per share dividend on dividend declared on investment on
1,000 shares of Denver preferred stock.
BALANCE SHEET
Assets
Cash
=
1,000
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Dividend Income
1,000
7-14
Nov. 5
Cash (BS)
Investment in Denver Preferred
Stock (BS) (book value)
Gain on Sale of Stock (IS)
To record sale of stock at a gain.
BALANCE SHEET
Assets
Cash
Investment in
Denver
Preferred
Stock
Liabilities
45,000
41,000
4,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
45,000
Gain on Sale
of Stock
4,000
(41,000)
LO 5
2008
Aug. 15
Assets
Liabilities
76,000
76,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Investment in
Sox Common
Stock
76,000
Cash
(76,000)
Oct. 20
Cash (BS)
Loss on Sale of Stock (IS)
Investment in Sox Common Stock (BS)
To record sale of stock at a loss.
50,000*
26,000**
76,000
*5,000 $10
**76,000 50,000
BALANCE SHEET
Assets
Cash
50,000
Investment in
Sox Common
Stock
(76,000)
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Loss on Sale
of Stock
(26,000)
LO 6
7-15
LO 6
$ 224,600
2,250,000
(X
$ 205,700
7-16
M U LTI C O N C E P T E X E R C I S E
LO 1,5,6
7-17
PROBLEMS
PROBLEM 7-1 ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
LO 1
1. Accounts Receivable
Cash
Sales Revenue
To record sales for year: $1,050,000 80% = $840,000
credit sales.
BALANCE SHEET
Assets
Accounts
Receivable
Cash
Liabilities
Cash
Accounts Receivable
To record collection of customer accounts.
BALANCE SHEET
Cash
Accounts
Receivable
Liabilities
1,050,000
670,000
670,000
INCOME STATEMENT
670,000
(670,000)
1,050,000
INCOME STATEMENT
840,000
210,000
Assets
840,000
210,000
4,000
(4,000)
Liabilities
4,000
4,000
INCOME STATEMENT
7-18
Liabilities
25,200
25,200
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debt
Expense
BALANCE SHEET
Allowance for
Doubtful
Accounts
Liabilities
20,010
20,010
$18,360 (cr)
1,650 (dr)
$20,010 (cr)
(25,200)
(25,200)
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debt
Expense
(20,010)
(20,010)
3.a. The net realizable value of accounts receivable on December 31, 2008, is
$282,450:
Accounts receivable, Dec. 31 (from Part 2.b.)
Less: Allowance for doubtful accounts, Dec. 31
($2,350 $4,000 + $25,200)
Net realizable value, December 31
$306,000
23,550
$282,450
3.b. The net realizable value of accounts receivable on December 31, 2008, is
$287,640:
Accounts receivable, Dec. 31 (from Part 2.b.)
Less: Allowance for doubtful accounts, Dec. 31
($2,350 $4,000 + $20,010)
Net realizable value, December 31
$306,000
18,360
$287,640
7-19
4. The recognition of bad debt expense reduces the net realizable value by the amount
recorded in bad debt expense and the allowance for doubtful accounts. The write-off
of accounts has no effect on the net realizable value.
LO 1
1.
Category
Current
Past due:
Less than one month
One to two months
Over two months
Totals
Amount
$200,000
45,000
25,000
10,000
$280,000
2. Journal entry:
2008
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
To record estimated bad debts:
$35,000 less $12,300 currently in
allowance account.
BALANCE SHEET
Assets
Allowance for
Doubtful
Accounts
Liabilities
Estimated
Percent
Uncollectible
5%
20%
40%
60%
Estimated
Amount
Uncollectible
$10,000
9,000
10,000
6,000
$35,000
22,700
22,700
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debts
Expense
(22,700)
$280,000
(35,000)
$245,000
(22,700)
7-20
LO 2
LO 4
$1.00
0.75
$0.25
The owner must net $1 per gallon on the selling price. The amount per gallon he
would have to charge credit card customers is
X 0.02X = 1.00
0.98X = 1.00
X = $1.02 per gallon
(It is worth noting that not all gas companies charge a higher price for credit card
purchases.)
2. If his normal charge is $1.02 to credit card customers, he can offer a $0.02 discount
to cash customers and still maintain his gross margin.
7-21
LO 5
2008
July 1
Assets
Investment in
Gallatin
Bonds
Cash
Oct. 23
Liabilities
Investment
in Eagle
Rock Stock
Cash
Nov. 21
10,000
(10,000)
Liabilities
Investment
in Montana
Stock
Cash
12,000
12,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
12,000
(12,000)
Assets
10,000
INCOME STATEMENT
BALANCE SHEET
Assets
10,000
6,000
(6,000)
Liabilities
6,000
6,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
7-22
Dec. 10
Cash
Dividend Income
To record receipt of dividends on
securities:
Eagle Rock600 $1.50
Montana200 $2.00
1,300
1,300
$ 900
400
$1,300
BALANCE SHEET
Assets
Cash
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
1,300
Dec. 28
Dividend Income
Cash
Investment in Eagle Rock Stock
Gain on Sale of Stock
To record sale of 400 shares of Eagle
Rock stock.
1,300
10,000*
8,000**
2,000
*$400 $25
**$400 $20
BALANCE SHEET
Assets
Cash
Investment
in Eagle
Rock Stock
Dec. 31
Liabilities
10,000
Gain on Sale
of Stock
2,000
(8,000)
Assets
Cash
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
=
300
Liabilities
300
300
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest Income
300
7-23
LO 5
2008
Jan. 15
Assets
Investment in
Sears Stock
Cash
May 23
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Cash
Dividend Income
To record receipt of dividends of $2 per
share on 200 shares of Sears stock.
BALANCE SHEET
=
Liabilities
Dividend Income
BALANCE SHEET
Investment in
Ford Stock
Cash
Oct. 20
Liabilities
400
7,700
7,700
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
7,700
(7,700)
Cash
Loss on Sale of Stock
Investment in Sears Stock
To record sale of Sears stock:
(200 shares $42) $400 = $8,000.
BALANCE SHEET
Assets
Cash
Investment in
Sears Stock
400
INCOME STATEMENT
Assets
400
400
June 1
10,500
10,500
(10,500)
Assets
Cash
10,500
=
8,000
(10,500)
Liabilities
8,000
2,500
10,500
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Loss on Sale
of Stock
(2,500)
7-24
Dec. 15
Dividends Receivable
Dividend Income
To record notification of the declaration
of $1.50 per share dividend on 100 shares
of Ford stock.
BALANCE SHEET
Assets
Dividends
Receivable
LO 6
Liabilities
150
150
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Dividend Income
150
$ 130,000
$(140,000)*
5,000**
(135,000)
$ (5,000)
110,000
$ 105,000
150
7-25
FROM:
Students name
DATE:
7-26
M U LTI C O N C E P T P R O B L E M
LO 1,3
1. Journal entries:
2008
May 15
Assets
Liabilities
INCOME STATEMENT
Sales Revenue
Assets
Allowance
for Doubtful
Accounts
Accounts
Receivable
C. Brown
Dec. 1
Liabilities
5,000
5,000
5,000
INCOME STATEMENT
5,000
(5,000)
Assets
Accounts
Receivable
C. Brown
Allowance
for Doubtful
Accounts
5,000
Accounts Receivable,
C. Brown
5,000
Aug. 10
5,000
5,000
(5,000)
Liabilities
5,000
5,000
INCOME STATEMENT
7-27
Dec. 1
Cash
Notes Receivable
Accounts ReceivableC. Brown
To record partial collection on open account
and receipt of two-month 9% note for the balance.
BALANCE SHEET
Assets
Cash
Notes
Receivable
Accounts
Receivable
C. Brown
Dec. 31
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
4,000
(5,000)
Interest Receivable
Interest Revenue
To accrue interest earned:
$4,000 9% 1/12.
30
30
BALANCE SHEET
=
Interest Receivable
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
30
Interest Revenue
Cash
Interest Receivable
Interest Revenue
Notes Receivable
To record collection of note and interest.
BALANCE SHEET
Assets
Cash
Interest
Receivable
Notes
Receivable
5,000
1,000
Assets
2009
Jan. 31
1,000
4,000
=
4,060
Liabilities
30
4,060
30
30
4,000
INCOME STATEMENT
30
(30)
(4,000)
2. Brown is interested in reestablishing a good credit standing with its supplier, Linus,
and for this reason has sent the check and signed a note for the balance.
7-28
A L T E R N AT E P R O B L E M S
PROBLEM 7-1A ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
LO 1
1. Accounts Receivable
Cash
Sales Revenue
To record sales for year: $787,500 80% = $630,000
credit sales.
BALANCE SHEET
Assets
Accounts
Receivable
Cash
Liabilities
630,000
157,500
BALANCE SHEET
Assets
Liabilities
502,500
502,500
INCOME STATEMENT
502,500
(502,500)
787,500
INCOME STATEMENT
Cash
Accounts Receivable
To record collection of customer accounts.
Cash
Accounts
Receivable
630,000
157,500
3,000
(3,000)
Liabilities
3,000
3,000
INCOME STATEMENT
7-29
Liabilities
18,900
18,900
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debt
Expense
0.06
Allowance balance needed
$ 13,770 (cr)
Balance before adjustment:
Beginning balance
$1,950 (cr)
Write-off
3,000 (dr)
1,050 (dr)
Amount of entry must be
$ 14,820 (cr)
BALANCE SHEET
Assets
Allowance
for Doubtful
Accounts
(18,900)
(18,900)
Liabilities
14,820
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Bad Debt
Expense
(14,820)
(14,820)
3.a. The net realizable value of accounts receivable on December 31, 2008, is
$211,650.
Accounts receivable, Dec. 31 (from Part 2.b.)
Less: allowance for doubtful accounts, Dec. 31
($1,950 $3,000 + $18,900)
Net realizable value, December 31
$229,500
17,850
$211,650
3.b. The net realizable value of accounts receivable on December 31, 2008, is
$215,730.
Accounts receivable, Dec. 31 (from Part 2.b.)
Less: allowance for doubtful accounts, Dec. 31
($1,950 $3,000 + $14,820)
Net realizable value, December 31
$229,500
13,770
$215,730
7-30
4. The recognition of bad debt expense reduces the net realizable value by the amount
recorded in bad debt expense and the allowance for doubtful accounts. The write-off
of accounts has no effect on the net realizable value.
LO 1
1.
Category
Current
Past due:
Less than one month
One to two months
Over two months
Totals
Amount
$200,000
60,300
35,000
45,000
$340,300
Estimated
Percent
Uncollectible
10%
25%
35%
75%
Estimated
Amount
Uncollectible
$20,000
15,075
12,250
33,750
$81,075
2. The controller is primarily responsible for the accuracy of the records, rather than the
collection process. Thus, the controllers main concern should be with the adequacy
of the balance in the allowance account. The amount of the allowance should
probably be increased, given the relatively large amount which is likely to be
uncollectible.
3. Partial balance sheet at December 31, 2008:
Current Assets
Accounts receivable
Less: Allowance for doubtful accounts
Net accounts receivable
LO 2
$340,300
81,075
$259,225
7-31
LO 4
$ 800
$40,000
0.015
600
$1,400
Conclusion: To cover the cost of the new equipment in the first year, new sales
would need to net $1,400 per outlet.
2. The company should also consider competition in its decision on the use of credit
cards. It may in fact suffer a loss of sales if its competitors start offering credit to
customers and it does not. The company may find that customer goodwill is
increased by the offer to use a credit card.
PROBLEM 7-5A INVESTMENTS IN BONDS AND STOCK
LO 5
2008
July 1
Assets
Investment in
Maine Bonds 10,000
Cash
(10,000)
Liabilities
10,000
10,000
INCOME STATEMENT
7-32
Liabilities
15,000
15,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Investment in
Virginia Stock 15,000
Cash
(15,000)
Nov. 21
Assets
Liabilities
4,800
4,800
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Investment in
Carolina Stock 4,800
Cash
(4,800)
Dec. 10
Cash
Dividend Income
To record receipt of dividends:
Virginia1,000 $0.50 = $ 500
Carolina600 $1.00 =
600
$1,100
BALANCE SHEET
Assets
Cash
Liabilities
1,100
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
1,100
Dec. 28
1,100
Dividend Income
Cash
Investment in Virginia Stock
Gain on Sale of Stock
To record sale of 700 shares of Virginia
stock.
1,100
13,300*
10,500**
2,800
*700 $19
**700 $15
BALANCE SHEET
Assets
Cash
13,300
Investment in
Virginia Stock (10,500)
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Gain on Sale
of Stock
2,800
7-33
Dec. 31
Cash
Interest Income
To record receipt of interest on bonds.
400*
400
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
400
Interest Income
400
LO 5
2008
Jan. 15
Assets
Investment in
IBM Stock
Cash
May 23
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Cash
Dividend Income
To record receipt of dividends of $1 per
share on 100 shares of IBM stock.
BALANCE SHEET
=
Liabilities
Investment in
GM Stock
Cash
100
INCOME STATEMENT
Dividend Income
Investment in GM Stock
Cash
To record purchase of 200 shares of
stock at $60 per share, plus $300 in
commissions.
BALANCE SHEET
Assets
100
100
June 1
13,250
13,250
(13,250)
Assets
Cash
13,250
=
12,300
(12,300)
Liabilities
100
12,300
12,300
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
7-34
Oct. 20
Cash
Investment in IBM Stock
Gain on Sale of Stock
To record sale of IBM stock:
(100 shares $140) $400.
BALANCE SHEET
Assets
Cash
Investment in
IBM Stock
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Gain on Sale
of Stock
350
(13,250)
Dividends Receivable
Dividend Income
To record notification of the declaration
of $0.75 per share dividend on 200 shares
of GM stock.
BALANCE SHEET
Assets
LO 6
13,250
350
13,600
Dec. 15
Dividends
Receivable
13,600
Liabilities
150
150
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Dividend Income
150
$(6,000)
47,000*
(7,800)**
$33,200
3,100
$36,300
150
7-35
FROM:
Students name
DATE:
7-36
A L T E R N AT E M U L T I C O N C E P T P R O B L E M
LO 1,3
1. Journal entries:
2008
July 31
Assets
Accounts
Receivable
P.D. Cat
Dec. 24
Liabilities
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Liabilities
6,000
6,000
INCOME STATEMENT
6,000
(6,000)
Assets
Accounts
Receivable
P.D. Cat
Allowance
for Doubtful
Accounts
6,000
6,000
BALANCE SHEET
2009
Jan. 15
6,000
Sales Revenue
Assets
Allowance for
Doubtful
Accounts
Accounts
Receivable
P.D. Cat
6,000
6,000
(6,000)
Liabilities
6,000
6,000
INCOME STATEMENT
7-37
Jan. 15
Cash
Notes Receivable
Accounts ReceivableP.D. Cat
To record partial collection on open
account and receipt of two-month 8%
note for the balance.
BALANCE SHEET
Assets
Cash
Notes
Receivable
Accounts
Receivable
P.D. Cat
Mar. 15
Liabilities
6,000
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
1,500
4,500
(6,000)
Cash
Interest Revenue
Notes Receivable
To record collection of note and interest:
$4,500 8% 2/12.
BALANCE SHEET
Assets
Cash
Notes
Receivable
1,500
4,500
=
4,560
Liabilities
4,560
60
4,500
INCOME STATEMENT
+ Stockholders Equity + Revenues Expenses
Interest Revenue
60
(4,500)
2. P.D. Cat is interested in reestablishing a good credit standing with its supplier,
Tweety, and for this reason has sent the check and signed a note for the balance.
7-38
D E C IS ION C AS E S
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1
DECISION CASE 7-1 READING APPLES BALANCE SHEET AND NOTES TO THE
STATEMENTS
1. The balance in the Allowance for Doubtful Accounts is $52 million at the end of 2006
and $46 million at the end of 2005.
2. The net realizable value of accounts receivable at the end of 2006 was $1,252
million, and at the end of 2005, $895 million.
3. The amount of bad debts expense is represented by the line on the table titled
Charged to costs and expenses. This amount is $17 million for 2006 and $8 million
for 2005.
4. The amount of accounts receivable written off is represented by the line on the table
titled Deductions. This amount is $11 million for 2006 and $9 million for 2005.
5. The increase in the amounts of accounts written off in the last two years could be
due to a number of factors. The company may have loosened its credit policies and
thus is experiencing more bad debts than in the past. The reduction may also be the
result of changes in the economy that have resulted in more companies unable to
pay amounts due to suppliers of credit. It is worth noting that there has also been an
increase in the amounts charged to costs and expenses in the last two years.
Increases in bad debts may be partially a result of increased sales by Apple.
LO 1,6
1. Apple spent $7,255 million to purchase short-term investments in 2006. This was
$4,215 million less than Apple spent on investments in 2005 but $3,985 million more
than was spent in 2004.
2. Apple received $7,226 million from investments that matured in 2006. This was
$1,383 million less than it received in 2005 and $6,085 more than in 2004.
3. Bonds mature, but stocks have no maturity date. Therefore, if a company holds
bonds until their maturity date, they will receive proceeds on that date. Bonds can be
sold on a date before they mature as well. Because stocks do not have a maturity
date, any proceeds are received on the date they are sold.
LO 3
7-39
7-40
TO:
FROM:
DATE:
X/X/XX
1. The entry to record the sale of the property violates two principles: the revenue
recognition principle and the historical cost principle. Revenue is recognized at the
appropriate time, when a sale takes place, but for the wrong amount. The fair value
of the property, $7.5 million, should be used as a measure of the amount of revenue
to be recognized, rather than the face value of the note.
2. TO:
7-41
Vice-president
FROM:
Students name
DATE:
12/31/XX
7-1