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E8-1. Accounts Receivable

BeginningAR $80,000

$1,000 Accounts written off

Credit sales X

35,000 Cash collected

Ending AR $74,000

$80,000 + X - $1,000 - $35,000 = $74,000 X = $30,000 = credit sales

Credit sales $30,000 Cash sales 30,000 Gross sales $60,000

E8-3. 1. The current ratio [$30,000/$10,000 = 3:1] does not change as a result of

the write-off to the allowance account. Accounts receivable and its contra account, allowance for doubtful accounts are reduced by the same amount [$100]. Thus, accounts receivable (net), which is the number used in computing the current ratio, does not change. b. X equals Y 2. Net accounts receivable[prior: $3,300 $300 = $3,000] does not change as a result of the write-off to the allowance account [after: $3,200 $200 = $3,000]. When the $100 account is written off, accounts receivable and allowance for doubtful accounts are reduced by the same amount. Thus net receivables are the same before and after the write-off. b. X equals Y 3. Gross accounts receivable will be lower after the write-off than before the write-off because accounts receivable is credited for the $100 uncollectible account that is written-off [$3,300 $100 = $3,200]. a. X greater than Y

E8-4. Requirement 1:

Allowance for doubtful accounts

$1,450 Beginning balance

1,500 Provision for bad debts

Accounts written off $1,800

X Additional provision for bad debts

$1,600 Ending Balance

$1,450 + $1,500 - $1,800 + X = $1,600 X = $450

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Total bad debt provision for the year ended December 31, 2014 should be: Provision for bad debts [$150,000 x 1%] $1,500 Additional provision for bad debts 450 Total bad debt provision $1,950 Requirement 2: To record the original provision for bad debts

DR Bad debt provision $ 1,500 CR Allowance for doubtful accounts $1,500

To record the write-off of bad debts DR Allowance for doubtful accounts $ 1,800

CR Accounts receivable $1,800

To record the additional provision for bad debts DR Bad debt provision $ 450

CR Allowance for doubtful accounts $450 E8-7. Requirement 1:

Calculation of the present value of Fletchers note at a 10% effective rate of interest:

Present value of $200,000 principal repayment in 5 years at 10% $200,000 x .62092 = $124,184 Present value of five interest payments of $12,000 ($200,000 x .05) each at 10%:

Year 1 $10,000 x .90909 = 9,091 Year 2 $10,000 x .82645 = 8,265 Year 3 $10,000 x .75132 = 7,513 Year 4 $10,000 x .68301 = 6,830 Year 5 $10,000 x .62092 = 6,209

Total present value of note $162,092

DR Notes receivable $162,092 CR Sales revenue $162,092

Requirement 2: DR Cash $10,000 DR Note receivable 6,209 CR Interest revenue [$162,092 x 10%] $16,209

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Requirement 3: The difference between interest revenue and cash received increases the carrying amount of the note receivable which will total $200,000 at maturity.

Requirement 4: Calculation of the present value of Fletchers note at a 12% effective rate of interest:

Present value of $200,000 principal repayment in 4 years at 12% $200,000 x .63552 = $127,104 Present value of four remaining interest payments of $12,000 ($200,000 x .05) each at 12%:

Year 1 $10,000 x .89286 = 8,929 Year 2 $10,000 x .79719 = 7,972 Year 3 $10,000 x .71178 = 7,118 Year 4 $10,000 x .63552 = 6,355

Total present (carrying) value of note @ 12/31/2014 $157,478

Requirement 5: DR Unrealized loss on note receivable $10,823 CR Fair value adjustment - note receivable $10,823 [$162,092 initial balance + $6,209 amortization] $157,478 fair value= $10,823

E8-9. Accounts receivable

Beginning balance $ 750,000

Credit sales for 2014 3,100,000 $ 45,000 Accounts written off during 2014

2,400,000 Collections from customers during 2014

Ending balance X

So, $750,000 + $3,100,000 - $45,000 - $2,400,000 = X X = $1,405,000

Given the factors recent offer, fair value can be established at 94% of the ending account balance or $1,320,700 = [$1,405,000 x 94%].

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Because this offer was to purchase the receivables without recourse, the balance in the allowance for doubtful accounts can be ignored (i.e., the factors offer represents the net value of the receivables).

E8-13.Requirement 1:

DR Due from factor ($17,500 $7,000 fee) $ 10,500 ($7,000=$175,000 x 4%) DR Allowance for doubtful accounts 3,000 DR Loss on sale of receivables (plug) 8,000

DR Cash ($175,000 x 90%) 157,500 CR Accounts receivable $175,000 CR Recourse liability 4,000

Requirement 2: DR Recourse liability $4,000

DR Cash ($10,500 - $2,500) 8,000 CR Due from factor $10,500 CR Loss on sale of receivables (plug) 1,500

(or Gain on sale if received in a subsequent year)