Exercise 7-21

Requirement 1

March 17, 2006 Allowance for uncollectible accounts ............................ Accounts receivable ................................................... 1,500 1,500 March 30, 2006 Note receivable ............................................................... 20,000 Cash ............................................................................ 20,000

Step 1: To accrue interest earned for two months on note receivable May 30, 2006 Interest receivable........................................................... Interest revenue (20,000 x 7% x 2/12) ............................. 233 233 Step 2: Add interest to maturity to calculate maturity value. Step 3: Deduct discount to calculate cash proceeds.

20,000 1,400 21,400 (1,427) 19,973 Face amount Interest to maturity (20,000 x 7%) Maturity value Discount (21,400 x 8% x 10/12) Cash proceeds Solutions Manual, Vol.1, Chapter 7

? The McGraw-Hill Companies, Inc., 2007

7-17

Exercise 7-21 (continued) Step 4: To record a loss for the difference between the cash proceeds and the note’s book value.

May 30, 2006 Cash (proceeds determined above) ........................................ 19,973 Loss on sale of note receivable (difference) ...................... 260 Interest receivable (from adjusting entry) ........................ 233 Note receivable (face amount) ....................................... 20,000 June 30, 2006 Accounts receivable ........................................................ 12,000 Sales revenue .............................................................. 12,000 July 8, 2006 Cash (12,000 x 98%) .......................................................... 11,760 Sales discounts (12,000 x 2%) ........................................... 240 Accounts receivable .................................................... 12,000 August 31, 2006 Notes receivable (face amount) .......................................... Discount on note receivable (6,000 x 8% x 6/12) ............ Investments (book value) ............................................... Gain on sale of investments (difference) ....................... 6,000 240 5,000 760 December 31, 2006 Bad debt expense (800,000 x 2%) ...................................... 16,000 Allowance for uncollectible accounts ........................ 16,000 ? The McGraw-Hill Companies, Inc., 2007 7-18

Intermediate Accounting, 4/e

Exercise 7-21 (concluded)

Requirement 2 To accrue interest earned on note receivable.

December 31, 2006 Discount on note receivable ........................................... Interest revenue (6,000 x 8% x 4/12) .............................. 160 160 Solutions Manual, Vol.1, Chapter 7

? The McGraw-Hill Companies, Inc., 2007

7-19

Exercise 7-22

1. c. 2. d. 3. c.

Exercise 7-23

Average collection period = 365 ÷ Accounts receivable turnover = 50 days

Accounts receivable turnover = 365 ÷ 50 = 7.3 Average accounts receivable = ($800,000 + 600,000) ÷ 2 = $700,000 Accounts receivable turnover = Net sales ÷ Average accounts receivable 7.3 = Net sales ÷ $700,000 Net sales = 7.3 x $700,000 = $5,110,000

? The McGraw-Hill Companies, Inc., 2007 7-20

Intermediate Accounting, 4/e