The trial balance before adjustment for phil collins company shows the following balances.

7-14.

(Journalizing Various Receivable Transactions)

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8

The trial balance before adjustment for Phil Collins Company shows the following balances.

Dr.

Cr.

Accounts Receivable

$82,000

Allowance for Doubtful Accounts

2,120

Sales Revenue

$430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

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1.

To obtain additional cash, Collins factors without recourse $25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

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2.

To obtain a 1-year loan of $55,000, Collins assigns $65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

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3.

The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

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4.

The company wishes to increase the allowance account by 1½% of net sales.

E7-16.

(Transfer of Receivables with Recourse)

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Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2014. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.

Instructions

(a)

What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale?

(b)

Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2014, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.

E7-18.

(Note Transactions at Unrealistic Interest Rates)

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On July 1, 2014, Agincourt Inc. made two sales.

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1.

It sold land having a fair value of $700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,101,460. The land is carried on Agincourt's books at a cost of $590,000.

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2.

It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000 (interest payable annually).

Agincourt Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2014.

*E7-23.

(Petty Cash)

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The petty cash fund of Fonzarelli's Auto Repair Service, a sole proprietorship, contains the following.

1.

Coins and currency

$ 15.20

2.

Postage stamps

2.90

3.

An I.O.U. from Richie Cunningham, an employee, for cash advance

40.00

4.

Check payable to Fonzarelli's Auto Repair from Pottsie Weber, an employee, marked NSF

34.00

5.

Vouchers for the following:

Stamps

$ 20.00

Two Rose Bowl tickets for Nick Fonzarelli

170.00

Printer cartridge

14.35

204.35

$296.45

The general ledger account Petty Cash has a balance of $300.

Instructions

Prepare the journal entry to record the reimbursement of the petty cash fund.

*E7-24.

(Bank Reconciliation and Adjusting Entries)

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Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.

June 30 Bank Reconciliation

Balance per bank

$ 7,000

Add: Deposits in transit

1,540

Deduct: Outstanding checks

(2,000)

Balance per books

$ 6,540

Month of July Results

Per Bank

Per Books

Balance July 31

$8,650

$9,250

July deposits

5,000

 5,810

July checks

4,000

 3,100

July note collected (not included in July deposits)

1,000

—

July bank service charge

15

—

July NSF check from a customer, returned by the bank (recorded by bank as a charge)

335

—

Instructions

(a)

Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.

(b)

Prepare the general journal entry or entries to correct the Cash account.

P7-3.

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(Bad-Debt Reporting—Aging)

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Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow's Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a)

What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b)

Show how accounts receivable would be presented on the balance sheet.

(c)

What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

(CMA adapted)

P7-8.

(Notes Receivable with Realistic Interest Rate)

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On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden's financial statements are prepared on a calendar-year basis.

Instructions

Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.

P7-10.

(Comprehensive Receivables Problem)

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Braddock Inc. had the following long-term receivable account balances at December 31, 2013.

Note receivable from sale of division

$1,500,000

Note receivable from officer

400,000

Transactions during 2014 and other information relating to Braddock's long-term receivables were as follows.

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1.

The $1,500,000 note receivable is dated May 1, 2013, bears interest at 9%, and represents the balance of the consideration received from the sale of Braddock's electronics division to New York Company. Principal payments of $500,000 plus appropriate interest are due on May 1, 2014, 2015, and 2016. The first principal and interest payment was made on May 1, 2014. Collection of the note installments is reasonably assured.

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2.

The $400,000 note receivable is dated December 31, 2013, bears interest at 8%, and is due on December 31, 2016. The note is due from Sean May, president of Braddock Inc. and is collateralized by 10,000 shares of Braddock's common stock. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2014. The quoted market price of Braddock's common stock was $45 per share on December 31, 2014.

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3.

On April 1, 2014, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zero-interest-bearing note due on April 1, 2016. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2014, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of $40,000 at January 1, 2014, and the amortization for the year ended December 31, 2014, would have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured.

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4.

On July 1, 2014, Braddock sold a parcel of land to Splinter Company for $200,000 under an installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2014, and signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note will be $45,125 payable on July 1, 2015, through July 1, 2018. The land could have been sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are such that the collection of the installments on the note is reasonably assured.

Instructions

(a)

Prepare the long-term receivables section of Braddock's balance sheet at December 31, 2014.

(b)

Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would appear in Braddock's balance sheet at December 31, 2014.

(c)

Prepare a schedule showing interest revenue from the long-term receivables that would appear on Braddock's income statement for the year ended December 31, 2014.

P7-