Exercise 7-9

Using the direct write-off method, bad debt expense is equal to actual write-offs. Collections of previously written-off receivables are recorded as revenue.

Allowance for uncollectible accounts: MXN Balance, beginning of year 17,500 Deduct: Receivables written off (17,100) Add: Collection of receivables previously written off 2,200 Less: End of year balance (22,000) Bad debt expense for the year 2006

19,400 Solutions Manual, Vol.1, Chapter 7

? The McGraw-Hill Companies, Inc., 2007

7-9

Exercise 7-10

Requirement 1 Book value of stock Plus gain on sale of stock = Note receivable Interest reported for the year Divided by value of note

USD

32,000 12,000 44,000 4,400 44,000

= 10% rate

Requirement 2 To record sale of stock in exchange for note receivable.

January 1, 2006 Note receivable ............................................................... 44,000 Investments ................................................................. 32,000 Gain on sale of investments ........................................ 12,000

To accrue interest on note receivable for twelve months. December 31, 2006 Interest receivable ........................................................... Interest revenue (44,000 x 10%) .................................... 4,400 4,400 ? The McGraw-Hill Companies, Inc., 2007 7-10

Intermediate Accounting, 4/e

Exercise 7-11

Requirement 1

June 30, 2006 Note receivable ............................................................... 60,000 Sales revenue .............................................................. 60,000 December 31, 2006 Interest receivable........................................................... 1,800 Interest revenue (60,000 x 6% x 6/12) ............................. 1,800 March 31, 2007 Cash [60,000 + (60,000 x 6% x 9/12)] ................................... 62,700 ............................. 900 Interest revenue (60,000 x 6% x 3/12) Interest receivable (accrued at December 31) .................. 1,800 Note receivable .......................................................... 60,000 Requirement 2

2006 income before income taxes would be understated by 1,800 2007 income before income taxes would be overstated by 1.800.

Solutions Manual, Vol.1, Chapter 7

? The McGraw-Hill Companies, Inc., 2007

7-11

Exercise 7-12

Requirement 1

June 30, 2006 Note receivable (face amount) ........................................... 60,000 Discount on note receivable (60,000 x 8% x 9/12) .......... 3,600 Sales revenue (difference) .............................................. 56,400 December 31, 2006 Discount on note receivable .......................................... 2,400 Interest revenue (60,000 x 8% x 6/12) ............................. 2,400 March 31, 2007 Discount on note receivable .......................................... 1,200 Interest revenue (60,000 x 8% x 3/12) ............................. 1,200 Cash ................................................................................ 60,000 Note receivable (face amount) ....................................... 60,000 Requirement 2 3,600 ÷ 56,400 = 6.38% x 12/9 _______ = 8.51%

interest for 9 months

sales price

rate for 9 months to annualize the rate effective interest rate

? The McGraw-Hill Companies, Inc., 2007 7-12

Intermediate Accounting, 4/e