Financial Accounting
Financial Accounting
18th Edition
ISBN: 9781260706307
Author: Jan Williams
Publisher: Mcgraw-hill Higher Education (us)
Question
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Chapter 7, Problem 7AP

a.

To determine

Prepare adjusting journal entries that arise due to bank reconciliation for Factory S as on December 31, Year 1.

a.

Expert Solution
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Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare adjusting journal entries that arise due to bank reconciliation for Factory S as on December 31, Year 1.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 1
December31Bank Service Charges50
Accounts Receivable750
Office Supplies468
Cash332
(Record payment of bank service charges, NSF check, and decrease office supplies)

Table (1)

Description:

  • Bank Service Charges is an expense account and the amount is increased because bank has charged service charges. Expenses decrease Equity account and decrease in Equity is debited.
  • Accounts Receivable is an asset account. The bank has not collected the amount from the customer due to insufficient funds, which was earlier recorded as a receipt. As the collection could not be made, amount to be received increased. Therefore, increase in asset would be debited.
  • Office Supplies is an asset account. The asset amount was erroneously recorded, and so cash balance decreased. Hence, asset is decreased by crediting.
  • Cash is an asset account. The amount is decreased because bank service charge is paid, bank could not collect amount due to insufficient funds in customer’s account, and a decrease in asset and asset is decreased.

b.

To determine

Prepare journal entry for adjusting the marketable securities to the fair market value, as on December 31, Year 1.

b.

Expert Solution
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Explanation of Solution

Prepare journal entry for adjusting the marketable securities to the fair market value, as on December 31, Year 1.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Year 1
December31Marketable Securities5,000
Unrealized Holding Gain on Investments5,000
(Record the adjustment of cost of investment to the fair value)

Table (2)

Description:

  • Marketable Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
  • Unrealized Holding Gain on Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited.

Working Notes:

Determine the unrealized gain or loss on investment on December 31, Year 1.

Unrealized holding gain or (loss)}{Fair value of investment on December 31– Cost of investment}=$57,000–$52,000=$5,000

c.

To determine

Journalize the adjustment entry of accrued interest revenue on December 31, Year 1.

c.

Expert Solution
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Explanation of Solution

Journalize the adjustment entry of accrued interest revenue on December 31, Year 1.

DateAccounts and ExplanationPost Ref.Debit ($)Credit ($)
Year 1
December31Interest Receivable500
Interest Revenue500
(Record accrued interest on note)

Table (3)

Description:

  • Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
  • Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of interest accrued on December 31, Year 1.

Interest accrued = {Principal amount of note × Rate of interest×Time period(Monthly interest)}= $120,000×5%×112= $500

d.

To determine

Journalize the uncollectible accounts expense transaction, if credit balance of Allowance for Doubtful Accounts is $1,400 prior to adjustments.

d.

Expert Solution
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Explanation of Solution

Journalize the uncollectible accounts expense transaction, if credit balance of Allowance for Doubtful Accounts is $8,000 prior to adjustments.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
Uncollectible Accounts Expense22,000
Allowance for Doubtful Accounts22,000
(Record uncollectible accounts expense)

Table (4)

Description:

  • Uncollectible Accounts Expense is an expense account. Since expenses and losses decrease the equity and an increase in equity is debited, so, Uncollectible Accounts Expense account is debited.
  • Allowance for Doubtful Accounts is a contra-asset account to Accounts Receivable account. The contra-asset accounts decrease the asset value, and a decrease in asset is credited.

Working Notes:

Compute the Uncollectible Accounts Expense value.

Step 1: Compute the Allowance for Doubtful Accounts beginning balance.

DetailsAmount ($)
Accounts receivable$900,000
Net realizable value(870,000)
Allowance for Doubtful Accounts balance$30,000

Table (5)

Step 2: Compute the Uncollectible Accounts Expense value.

DetailsAmount ($)
Credit balance prior to adjustment$8,000
Credit adjustment required22,000
Credit balance required$30,000

Table (6)

Note: Refer to Table (5) for value and computation of credit balance required.

e.

To determine

Discuss the effect of reporting the net realizable value on accounts receivable turnover rate, and explain whether the effect of written off accounts receivable on accounts receivable turnover rate has the same effect of reporting the net realizable value on accounts receivable turnover rate.

e.

Expert Solution
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Explanation of Solution

Net realizable value: The value of accounts receivables that could be recognized by the company is referred to as net realizable value. In simple words, net realizable value is accounts receivables, less allowance of uncollectible amount.

Accounts receivable turnover: This is the ratio which analyzes the number of times accounts receivables is collected and converted into cash during the period. This ratio gauges the efficacy of collecting receivables. Larger the ratio, more efficient in collecting receivables.

Effect of reporting the net realizable value on accounts receivable turnover rate: Since the uncollectible accounts expense decreases the net realizable value of accounts receivable, the accounts receivable turnover increases.

Effect of written off accounts receivable on accounts receivable turnover rate: As the write-off of accounts receivable has no effect on net realizable value of accounts receivable, the accounts receivable turnover remains the same. So, the written off accounts receivable does not have the same effect on accounts receivable turnover rate as the reporting of the net realizable value has on accounts receivable turnover rate.

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Chapter 7 Solutions

Financial Accounting

Ch. 7 - Puget Sound Co. sold marketable securities costing...Ch. 7 - Prob. 1DQCh. 7 - Prob. 2DQCh. 7 - Prob. 3DQCh. 7 - 4. What are lines of credit? From the viewpoint of...Ch. 7 - Prob. 5DQCh. 7 - Prob. 6DQCh. 7 - Prob. 7DQCh. 7 - 8. Explain the fair value adjustment procedure for...Ch. 7 - Prob. 9DQCh. 7 - 10. Explain the relationship between the matching...Ch. 7 - 11. In making the annual adjusting entry for...Ch. 7 - 12. Must companies use the same method of...Ch. 7 - Prob. 13DQCh. 7 - Prob. 14DQCh. 7 - 15. What is the formula for computing interest on...Ch. 7 - BRIEF EXERCISE 7.1 Cash and Cash Equivalents The...Ch. 7 - Prob. 2BECh. 7 - Prob. 3BECh. 7 - BRIEF EXERCISE 7.4 Accounting for Marketable...Ch. 7 - Prob. 5BECh. 7 - BRIEF EXERCISE 7.6 Accounting for Uncollectible...Ch. 7 - BRIEF EXERCISE 7.7 Accounting for Uncollectible...Ch. 7 - BRIEF EXERCISE 7.8 Analyzing Accounts...Ch. 7 - BRIEF EXERCISE 7.9 Notes Receivable and...Ch. 7 - BRIEF EXERCISE 7.10 Industry Characteristics and...Ch. 7 - BRIEF EXERCISE 7.11 Analyzing Accounts...Ch. 7 - Prob. 1ECh. 7 - EXERCISE 7.2 Financial Assets The following...Ch. 7 - Prob. 3ECh. 7 - Prob. 4ECh. 7 - Prob. 5ECh. 7 - Prob. 6ECh. 7 - EXERCISE 7.7 The Nature of Marketable...Ch. 7 - EXERCISE 7.8 Reporting Uncollectible Accounts The...Ch. 7 - EXERCISE 7.9 Industry Characteristics and...Ch. 7 - Prob. 10ECh. 7 - Prob. 11ECh. 7 - EXERCISE 7.12 Effects of Accounting...Ch. 7 - EXERCISE 7.13 Accounting for Marketable...Ch. 7 - Prob. 14ECh. 7 - EXERCISE 7.15 Using the Financial Statements of...Ch. 7 - Prob. 1APCh. 7 - Prob. 2APCh. 7 - PROBLEM 7.3A Aging Accounts Receivable;...Ch. 7 - PROBLEM 7.4A Accounting for Uncollectible...Ch. 7 - Prob. 5APCh. 7 - PROBLEM 7.6A Notes Receivable Eastern Supply sells...Ch. 7 - Prob. 7APCh. 7 - Prob. 8APCh. 7 - Prob. 1BPCh. 7 - Prob. 2BPCh. 7 - PROBLEM 7.3B Aging Accounts Receivable;...Ch. 7 - PROBLEM 7.4B Accounting for Uncollectible...Ch. 7 - Prob. 5BPCh. 7 - PROBLEM 7.6B Notes Receivable Midtown Distribution...Ch. 7 - Prob. 7BPCh. 7 - Prob. 8BPCh. 7 - CASE 7.1 Accounting Principles In each of the...Ch. 7 - CASE 7.2 If Things Get Any Better, We’ll Be...Ch. 7 - CASE 7.3 “Improving” the Balance Sheet Affections...
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