CHAPTER 7 CASH AND RECEIVABLESQuestion 7-10 The income statement approach to estimating bad debts determines bad debt expense directly by relating uncollectible amounts to credit sales. The balance sheet approach to estimating future bad debts indirectly determines bad debt expense by estimating the net realizable value for accounts receivable that exist at the end of the period. In other words, the allowance for uncollectible accounts at the end of the period is estimated and then bad debt expense is determined by adjusting the allowance account to reflect net realizable value. Question 7-14 U.S. GAAP focuses on whether control of assets has shifted from the transferor to the transferee. In contrast, IFRS focuses on whether the company has transferred “substantially all of the risks and rewards of ownership,” as well as whether the company has transferred control. Under IFRS:If the company transfers substantially all of the risks and rewards of ownership, the transfer is treated as a sale.If the company retains substantially all of the risks and rewards of ownership, the transfer is treated as a secured borrowing. If neither conditions 1 or 2 hold, the company accounts for the transaction as a sale if it has transferred control, and as a secured borrowing if it has retained control.BRIEF EXERCISESBrief Exercise 7-8(1) Bad debt expense = $1,500,000 x 2% = $30,000(2) Allowance for uncollectible accounts: Beginning balance$25,000 Add: Bad debt expense30,000 Deduct: Write-offs(16,000) Ending balance$39,000Brief Exercise 7-9(1)Allowance for uncollectible accounts:Beginning balance$ 25,000 Deduct: Write-offs(16,000) Required allowance(33,400)*Bad debt expense$24,400(2)Required allowance = $334,000* x 10% = $33,400*Accounts receivable:Beginning balance$ 300,000 Add: Credit sales1,500,000 Deduct: Cash collections(1,450,000) Write-offs (16,000)Ending balance$ 334,000*EXERCISESExercise 7-9Requirement 1To record the write-off of receivables.Allowance for uncollectible accounts21,000Accounts receivable21,000To reinstate an account previously written off and to record the collection.Accounts receivable1,200Allowance for uncollectible accounts1,200Cash1,200Accounts receivable1,200Allowance for uncollectible accounts:Balance, beginning of year$32,000Deduct: Receivables written off(21,000)Add: Collection of receivable previously written off 1,200Balance, before adjusting entry for 2011 bad debts12,200Required allowance: 10% x $625,000(62,500)Bad debt expense$50,300To record bad debt expense for the year.Bad debt expense50,300Allowance for uncollectible accounts50,300Requirement 2Current assets:Accounts receivable, net of $62,500 allowance for uncollectible accounts$562,500Exercise 7-13Requirement 1June 30, 2011Note receivable (face amount)30,000Discount on note receivable ($30,000 x 8% x 9/12)1,800Sales revenue (difference)28,200December 31, 2011Discount on note receivable 1,200Interest revenue ($30,000 x 8% x 6/12)1,200March 31, 2012Discount on note receivable 600Interest revenue ($30,000 x 8% x 3/12)600Cash 30,000Note receivable (face amount)30,000Requirement 2$ 1,800interest for 9 months $28,200sales price= 6.383%rate for 9 monthsx 12/9to annualize the rate_= 8.511%effective interest rateExercise 7-14Requirement 1Book value of stock$16,000Plus gain on sale of stock 6,000 = Note receivable$22,000Interest reported for the year$ 2,200=10% rateDivided by value of note$ 22,000Requirement 2To record sale of stock in exchange for note receivable.January 1, 2011Note receivable22,000Investments16,000Gain on sale of investments6,000To accrue interest on note receivable for twelve months.December 31, 2011Interest receivable2,200Interest revenue ($22,000 x 10%)2,200Exercise 7-17Cash (90% - 2% x $60,000)52,800Loss on sale of receivables (to balance)5,200Receivable from factor ($5,000 fair value)5,000Recourse liability 3,000Accounts receivable (balance sold)60,000Exercise 7-21Requirement 1March 17, 2011Allowance for uncollectible accounts1,700Accounts receivable1,700March 30, 2011Note receivable20,000Cash20,000Step 1: To accrue interest earned for two months on note receivable May 30, 2011Interest receivable233Interest revenue ($20,000 x 7% x 2/12)233Step 2: Add interest to maturity to calculate maturity value.Step 3: Deduct discount to calculate cash proceeds.$20,000 Face amount1,400Interest to maturity ($20,000 x 7%)21,400Maturity value(1,427)Discount