PROBLEM 7-2

1. Net sales................................................................................................ $1,200,000

Percentage ........................................................................................... 1 1/2%
Bad debt expense .............................................................................. $ 18,000

2. Accounts receivable ......................................................................... $1,750,000

Amounts estimated to be uncollectible...................................... (180,000)
Net realizable value ........................................................................... $1,570,000

3. Allowance for doubtful accounts 1/1/10..................................... $ 17,000

Establishment of accounts written off in prior years............. 8,000
Customer accounts written off in 2010....................................... (30,000)
Bad debt expense for 2010 ($2,400,000 X 3%).......................... 72,000
Allowance for doubtful accounts 12/31/10 ................................ $ 67,000

4. Bad debt expense for 2010 ............................................................. $ 84,000

Customer accounts written off as uncollectible
during 2010...................................................................................... (24,000)
Allowance for doubtful accounts balance 12/31/10................ $ 60,000

Accounts receivable, net of allowance

for doubtful Accounts.................................................................. $ 950,000
Allowance for doubtful accounts balance 12/31/10................ 60,000
Accounts receivable, before deducting
allowance for doubtful accounts.............................................. $1,010,000

5. Accounts receivable ......................................................................... $ 310,000

Percentage ........................................................................................... 3%
Bad debt expense, before adjustment ........................................ 9,300
Allowance for doubtful accounts (debit balance) ................... 14,000
Bad debt expense, as adjusted ..................................................... $ 23,300

Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 7-47
 PROBLEM 7-3

(a) The Allowance for Doubtful Accounts should have a balance of $45,000
at year-end. The supporting calculations are shown below:

Expected
Days Account Percentage Estimated
Outstanding Amount Uncollectible Uncollectible
0–15 days $300,000 .02 $ 6,000
16–30 days 100,000 .10 10,000
31–45 days 80,000 .15 12,000
46–60 days 40,000 .20 8,000
61–75 days 20,000 .45 9,000

Balance for Allowance for Doubtful Accounts $45,000

The accounts which have been outstanding over 75 days ($15,000)

and have zero probability of collection would be written off immediately
by a debit to Allowance for Doubtful Accounts for $15,000 and a credit
to Accounts Receivable for $15,000. It is not considered when deter-
mining the proper amount for the Allowance for Doubtful Accounts.

(b) Accounts receivable ($555,000 – $15,000).............................. $540,000

Less: Allowance for doubtful accounts.................................. 45,000
Accounts receivable (net)............................................................. $495,000

(c) The year-end bad debt adjustment would decrease before-tax income
$20,000 as computed below:

Estimated amount required in the Allowance

for Doubtful Accounts............................................................... $45,000
Balance in the account after write-off of uncollectible
accounts but before adjustment ($40,000 – $15,000) ..... 25,000
Required charge to expense ....................................................... $20,000

7-48 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 7-4

(a) FORTNER CORPORATION

Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2010
Balance at January 1, 2010......................................................... $130,000
Provision for doubtful accounts ($9,000,000 X 2%) ........... 180,000
Recovery in 2010 of bad debts written off previously....... 15,000
325,000
Deduct write-offs for 2010 ($90,000 + $60,000) .................... 150,000
Balance at December 31, 2010 before change
in accounting estimate ............................................................ 175,000
Increase due to change in accounting estimate
during 2010 ($263,600 – $175,000)....................................... 88,600
Balance at December 31, 2010 adjusted (Schedule 1) ...... $263,600

Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2010
Aging Doubtful
Category Balance % Accounts
Nov–Dec 2010 $1,080,000 2 $ 21,600
July–Oct 650,000 10 65,000
Jan–Jun 420,000 25 105,000
Prior to 1/1/10 90,000(a) 80 72,000
$263,600

(a) $150,000 – $60,000

Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 7-49
 PROBLEM 7-7

July 1, 2010
Cash .................................................................................................. 119,250
Finance Charge (.005 X $150,000)........................................... 750
Notes Payable (80% X $150,000)................................... 120,000

July 31, 2010

Notes Payable................................................................................ 80,000
Accounts Receivable........................................................ 80,000

Finance Charge ............................................................................. 350

Finance Charge Payable (.005 X $70,000).................. 350

August 31, 2010

Notes Payable................................................................................ 40,000
Cash* ................................................................................................ 9,550
Finance Charge (.005 X [$150,000 –
$80,000 – $50,000]) ................................................................... 100
Finance Charge Payable ............................................................ 350
Accounts Receivable........................................................ 50,000

*Total cash collection................................................................ $50,000

Less: Finance charge payable (from previous entry) ..... (350)
Finance charge (current month) [(.005 X
($150,000 – $80,000 – $50,000)] ................................ (100)
Note payable (balance) ($120,000 – $80,000) ......... (40,000)
Cash collected............................................................................... $ 9,550

7-54 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 7-8

10/1/10 Notes Receivable .......................................... 120,000

Sales....................................................... 120,000

12/31/10 Interest Receivable....................................... 2,400*

Interest Revenue ................................ 2,400

*$120,000 X .08 X 3/12 = $2,400

10/1/11 Cash .................................................................. 9,600*

Interest Receivable............................ 2,400
Interest Revenue ................................ 7,200**

*$120,000 X .08 = $9,600

**$120,000 X .08 X 9/12 = $7,200

12/31/11 Interest Receivable....................................... 2,400

Interest Revenue ................................ 2,400

10/1/12 Cash .................................................................. 9,600

Interest Receivable............................ 2,400
Interest Revenue ................................ 7,200

Cash .................................................................. 120,000

Notes Receivable ............................... 120,000

Note: Entries at 10/1/11 and 10/1/12 assumes reversing entries were not
made on January 1, 2011 and January 1, 2012.

Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 7-55
 PROBLEM 7-9

(a) December 31, 2010

Cash................................................................................... 40,000
Notes Receivable........................................................... 80,000
Discount on Notes Receivable....................... 17,951
Service Revenue ................................................. 102,049

To record revenue at the present value of the

note plus the immediate cash payment:
PV of $20,000 annuity @ 11% for
4 years ($20,000 X 3.10245)................ $ 62,049
Down payment........................................... 40,000
Capitalized value of services................ $102,049

(b) December 31, 2011

Cash.......................................................................................... 20,000
Notes Receivable ....................................................... 20,000

Discount on Notes Receivable......................................... 6,825

Interest Revenue ........................................................ 6,825

Schedule of Note Discount Amortization

Cash Interest Carrying

Date Received Revenue Amount of Note
12/31/10 — — $62,049
a b
12/31/11 $20,000.00 $6,825 48,874
12/31/12 20,000.00 5,376 34,250
12/31/13 20,000.00 3,768 18,018
12/31/14 20,000.00 1,982 —

$6,825 = $62,049 X 11%

a

$48,874 = $62,049 + $6,825 – $20,000.00

b

7-56 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
PROBLEM 7-9 (Continued)

(c) December 31, 2012

Cash ....................................................................... 20,000
Notes Receivable..................................... 20,000

Discount on Notes Receivable ...................... 5,376

Interest Revenue...................................... 5,376

(d) December 31, 2013

Cash ....................................................................... 20,000
Notes Receivable..................................... 20,000

Discount on Notes Receivable ...................... 3,768

Interest Revenue...................................... 3,768

(e) December 31, 2014

Cash ....................................................................... 20,000
Notes Receivable..................................... 20,000

Discount on Notes Receivable ...................... 1,982

Interest Revenue...................................... 1,982

Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 7-57