EXAMPLE #1:CASH, CASH EQUIVALENT, OR OTHER CLASSIFICATION

Compute the amount of “Cash and Cash Equivalents” to be reported on the balance sheet

ITEM AND AMOUNT CASH, CASH EQUIVALENT, OR OTHER

Checking Account Balance - $925,000 ______________________

Certificates of Deposits - $ 1,400,000 ______________________

Cash Advance to Subsidiary - $980,000 ______________________

Bank Overdraft (one account at bank) - $ 17,000 ______________________

Money market fund - $ 48,000 ______________________

Cash restricted for future plant expansion - $ 500,000 _______________________

Coins and currency on hand - $ 1,350 _______________________

Petty cash fund - $ 1,000 _______________________

Savings Account Balance - $ 600,000 _______________________

Treasury Bills - $ 180,000 ________________________

Post-dated check (after balance sheet date) - $ 5,000 ________________________

Travel advances for employees - $ 15,500 _________________________

Certified check from customer - $ 9,800 __________________________

EXAMPLE #1: (Solution)CASH, CASH EQUIVALENT, OR OTHER CLASSIFICATION

Compute the amount of “Cash and Cash Equivalents” to be reported on the balance sheet

ITEM AND AMOUNT CASH, CASH EQUIVALENT, OR OTHER

Checking Account Balance - $925,000 Cash - $925,000

Certificates of Deposits - $1,400,000 Temporary Investments - $

1,400,000

Cash Advance to Subsidiary - $980,000 Receivable (current)- $ 980,000

Bank Overdraft (one account at bank) - $17,000 Current Liability - $17,000

Money market fund - $48,000 Cash - $48,000

Cash restricted for future plant expansion - $500,000 Long-term asset - $ 500,000

Coins and currency on hand - $1,350 Cash - $1,350

Petty cash fund - $1,000 Cash - $1,000

Savings Account Balance - $600,000 Cash - $600,000

Treasury Bills - $180,000 Cash Equivalent - $180,000

Post-dated check (after balance sheet date) - $5,000 Accounts Receivable - $5,000

Travel advances for employees - $15,500 Receivable (current) - $15,500

Certified check from customer - $9,800 Cash - $9,800

TOTAL CASH AND CASH EQUIVALENTS = $1,765,150

EXAMPLE #2:Sales Discounts - Gross vs. Net Method

Instruction:Prepare the journal entries on Bolton Company books to record the sale and receipt of payment from Arquette Company in # 1 - 3 below (treat each independently), using both the gross and net methods of recording sales with cash discounts.

1. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12 th, the company received a check for the balance due from Arquette Company.

Gross Method Net Method

6/3

6/12

2. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Arquette Company did not remit the full payment until July 29th.

Gross Method Net Method

6/3

7/29

3. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Arquette Company paid for $1000 of the merchandise on June 12th but did not remit the full payment until July 29th.

Gross Method Net Method

6/3

6/12

7/29

EXAMPLE #2: (Solution)Sales Discounts - Gross vs. Net Method

Instruction:Prepare the journal entries on Bolton Company books to record the sale and receipt of payment from Arquette Company in # 1 - 3 below, using both the gross and net methods of recording sales with cash discounts.

1. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12 th, the company received a check for the balance due from Arquette Company.

Gross Method Net Method 6/3

A/R 2000Sales 2000

A/R 1960 Sales 1960

6/12 Cash 1960 Discount 40

A/R 2000

Cash 1960 A/R 1960

2. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Arquette Company did not remit the full payment until July 29th.

Gross Method Net Method 6/3

A/R 2000 Sales 2000

A/R 1960 Sales 1960

7/29 Cash 2000 A/R 2000

Cash 2000 Discount Forfeited 40 A/R 1960

3. On June 3rd, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Arquette Company paid for $1000 of the merchandise on June 12th but did not remit the full payment until July 29th.

Gross Method Net Method 6/3

A/R 2000 Sales 2000

A/R 1960 Sales 1960

6/12 Cash 980 Discount 20

A/R 1000

Cash 980 A/R 980

7/29 Cash 1000 A/R 1000

Cash 1000 Discount Forfeited 20 A/R 980

EXAMPLE #3:Recording Bad Debts

Roberts, Inc. reported the following financial information for 2010:

Dr. Cr.Accounts Receivable $250,000Allowance for Doubtful Accounts $2,500Sales (all on credit) $900,000Sales Returns and Allowances 200,000

The accounts receivable aging schedule for Roberts, Inc. appears as follows:

Age Amount % UncollectibleUnder 30 days old $150,000 5% (7500)30 – 60 days old 70,000 10% (7000)60 – 90 days old 25,000 15% (3750)Over 90 days old 5,000 20% (1000)

= 19250

1. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts at 2% of net sales.

2. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts at 8% of accounts receivable.

3. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts using the aging method.

EXAMPLE #3: (Solution)Recording Bad Debts

Roberts, Inc. reported the following financial information for 2010:

Dr. Cr.Accounts Receivable $250,000Allowance for Doubtful Accounts $2,500Sales (all on credit) $900,000Sales Returns and Allowances 200,000

The accounts receivable aging schedule for Roberts, Inc. appears as follows:

Age Amount % UncollectibleUnder 30 days old $150,000 5% (7500)30 – 60 days old 70,000 10% (7000)60 – 90 days old 25,000 15% (3750)Over 90 days old 5,000 20% (1000)

= 19250

1. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts at 2% of net sales.

Bad Debt Expense 14,000Allowance for Doubtful Accounts 14,000

Note – the balance in the Allowance for Doubtful Accounts goes to $16,500 (2,500 + 14,000)

2. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts at 8% of accounts receivable.

Bad Debt Expense 17500 20000 – 2500 = 17500Allowance for Doubtful Accounts 17500

Note – the balance in the Allowance for Doubtful Accounts goes to $20,000 which is 8% of accounts receivable (2,500 + 17,500)

3. Prepare the journal entry to record bad debt expense assuming Roberts Company estimates bad debts using the aging method.

Bad Debt Expense 16750 19250 – 2500 = 16750Allowance for Doubtful Accounts 16750

Note – the balance in the Allowance for Doubtful Accounts goes to $19,250 which is the amount per the aging schedule (2,500 + 16,750)

EXAMPLE #4:Recognition of Notes Receivable

1. Face Value: Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

2. Discount (Zero-Interest Bearing): Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

Hint – a zero-interest bearing note does not have a regular interest payment. The note is issued at a discount (below face value) and the interest is the difference between the issue amount and the face value (the amount paid at maturity). The interest should be amortized and expensed over the life of the note.

3. Discount (Interest Bearing): Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

EXAMPLE #4: (Solution)Recognition of Notes Receivable

1. Face Value: Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

PV Principal (N=3,I/YR=10,FV=10000) = 10,000 X .75132 = $7513PV Interest (N=3,I/YR=10,PMT=1000) = 1,000 X 2.48685 = $2487

= $10000

Description Accounts Dr Cr

To record receipt Note Receivable 10,000 Cash 10,000

To record interest Cash 1,000each year Interest Rev. 1,000

To record pay off Cash 10,000 Note Receivable 10,000

2. Discount (Zero-Interest Bearing): Jeremiah Company receives a three-year, $10,000 zero interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

Hint – a zero-interest bearing note does not have a regular interest payment. The note is issued at a discount (below face value) and the interest is the difference between the issue amount and the face value (the amount paid at maturity). The interest should be amortized and expensed over the life of the note.

PV Principal (N=3,I/YR=9,FV=10000) = 10,000 X .77218 = $7721.80

Description Accounts Dr Cr

To record receipt Note Receivable 10,000 Discount on Note 2,278.20

Cash 7,721.80------------------------To record interest Discount on Note 694.96yr 1 Interest Rev. 694.96

(7,721.8 *.09 = 694.96)

To record interest Discount on Note 757.51yr 2 Interest Rev. 757.51

(8,416.76 * .09 = 757.51)

To record interest Discount on Note 825.73yr 3 Interest Rev. 825.73

(9,174.27 * .09 = 825.73)

------------------------To record pay off Cash 10,000 Note Receivable 10,000

====================================================================Amortization Schedule

Cash Interest Discount Note Date Received Revenue Amortized Carrying ValueIssue date 7,721.80

End yr 1 0 694.96 694.96 8,416.76End yr 2 0 757.51 757.51 9,174.27End yr 3 0 825.73 825.73 10,000.00

3. Discount (Interest Bearing): Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note? What is the entry to record interest revenue at the end of each year? What is the entry when the note is paid off?

PV Principal (N=3,I/YR=12,FV=10000) = 10,000 X .71178 = $7117.83PV Interest (N=3,I/YR=12,PMT=1000) = 1,000 X 2.40183 = $2401.80

= $9519.63

Description Accounts Dr Cr

To record receipt Note Receivable 10,000 Discount on Note 480.37

Cash 9,519.63--------------------------To record interest Cash 1,000.00 Yr 1 Discount on Note 142.46

Interest Rev. 1,142.46 (9,519.63 *.12 = 1,142.46)

To record interest Cash 1,000.00 Yr 2 Discount on Note 159.44

Interest Rev. 1,159.44 (9,661.99 *.12 = 1,159.44)

To record interest Cash 1,000.00 Yr 3 Discount on Note 178.57

Interest Rev. 1,178.57 (9,821.43 *.12 = 1,178.57)

------------------------To record pay off Cash 10,000 Note Receivable 10,000

====================================================================Amortization Schedule

Cash Interest Discount Note

Date Received Revenue Amortized Carrying ValueIssue date 9,519.63End yr 1 1,000.00 1,142.36 142.36 9,661.99End yr 2 1,000.00 1,159.44 159.44 9,821.43End yr 3 1,000.00 1,178.57 178.57 10,000.00

EXAMPLE #5:Secured Borrowing

1. On October 1, 2010, Chung, Inc. assigns $1,000,000 of its accounts receivable to Seneca National Bank as collateral for a $750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

2. On April 1, 2010, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2010. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10%. Prince collects $350,000 of the accounts receivable on June 30, 2010 and pays off the note to Third on July 1, 2010. Record the journal entries for Prince only.

4/1

6/30

7/1

EXAMPLE #5: (Solution)Secured Borrowing

1. On October 1, 2010, Chung, Inc. assigns $1,000,000 of its accounts receivable to Seneca National Bank as collateral for a $750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

C Cash 730000Interest Expense 20000 (2% x 1000000 = 20000)

Notes Payable 750000

S Notes Receivable 750000Cash 730000Interest Revenue 20000

2. On April 1, 2010, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2010. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10%. Prince collects $350,000 of the accounts receivable on June 30, 2010 and pays off the note to Third on July 1, 2010. Record the journal entries for Prince only.

4/1 Cash 290000Interest Expense 10000 (2% x 500000 = 10000)

Notes Payable 300000

6/30 Cash 350000Accounts Receivable 350000

7/1 Notes Payable 300000Interest Expense 7500 (10% x 300000 x 3/12 = 7500)

Cash 307500

EXAMPLE #6:Sales of Receivables

Jedd Hale Corporation factors $90,000 of accounts receivable with KS Financing, Inc. KS Financing will collect the receivables. A finance charge of 4% of receivables is assessed by KS Financing and 6% of the receivables are retained to cover probable adjustments.

1. Prepare the journal entry for Jedd Hale to record the sale of receivables, assuming that the receivables were transferred on a “without recourse” basis.

2. Prepare the journal entry for Jedd Hale to record the sale of receivables, assuming that the receivables were transferred on a “with recourse” basis and the recourse obligation has a fair value of $2,000.

Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., who assesses a finance charge of 3% of the amount of accounts receivable and retains an amount equal to 5% of the accounts receivable (for probable adjustments).

3. Prepare the journal entry for Crest to record the sale of receivables, assuming that the receivables were transferred on a “without recourse” basis.

4. Prepare the journal entry for Crest to record the sale of receivables, assuming that the receivables were transferred on a “with recourse” basis and the recourse obligation has a fair value of $6,000.

EXAMPLE #6: (Solution)Sales of Receivables

Jedd Hale Corporation factors $90,000 of accounts receivable with KS Financing, Inc. KS Financing will collect the receivables. A finance charge of 4% of receivables is assessed by KS Financing and 6% of the receivables are retained to cover probable adjustments.

5. Prepare the journal entry for Jedd Hale to record the sale of receivables, assuming that the receivables were transferred on a “without recourse” basis.

Cash 81000Due from factor 5400 (90000 x 6%)Loss on sale of receivable 3600 (90000 x 4%)

A/R 90000

6. Prepare the journal entry for Jedd Hale to record the sale of receivables, assuming that the receivables were transferred on a “with recourse” basis and the recourse obligation has a fair value of $2,000.

Cash 81000Due from factor 5400 (90000 x 6%)Loss on sale of receivable 5600 (90000 x 4% + 2000)

A/R 90000Recourse Liability 2000

Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., who assesses a finance charge of 3% of the amount of accounts receivable and retains an amount equal to 5% of the accounts receivable (for probable adjustments).

7. Prepare the journal entry for Crest to record the sale of receivables, assuming that the receivables were transferred on a “without recourse” basis.

Cash 460000Due from factor 25000 (500000 x 5%)Loss on sale of receivable 15000 (500000 x 3%)

A/R 500000

8. Prepare the journal entry for Crest to record the sale of receivables, assuming that the receivables were transferred on a “with recourse” basis and the recourse obligation has a fair value of $6,000.

Cash 460000Due from factor 25000 (500000 x 5%)Loss on sale of receivable 21000 (500000 x 3% + 6000)

A/R 500000Recourse Liability 6000