EXAMPLE #1:

CASH, CASH EQUIVALENT, OR OTHER CLASSIFICATION

Compute the amount of Cash and Cash Equivalents to be reported
on the balance sheet
ITEM AND AMOUNT

CASH, CASH EQUIVALENT, OR OTHER

Checking Account Balance - $925,000

______________________
Certificates of Deposits - $ 1,400,000
______________________
Cash Advance to Subsidiary - $980,000
______________________
Bank Overdraft (one account at bank) - $ 17,000
______________________
Money market fund - $ 48,000
______________________
Cash restricted for future plant expansion - $ 500,000
_______________________
Coins and currency on hand - $ 1,350
_______________________
Petty cash fund - $ 1,000
_______________________
Savings Account Balance - $ 600,000
_______________________

Treasury Bills - $ 180,000

________________________
Post-dated check (after balance sheet date) - $ 5,000
________________________
Travel advances for employees - $ 15,500

_________________________

Certified check from customer - $ 9,800

__________________________

EXAMPLE #1: (Solution)

CASH, CASH EQUIVALENT, OR OTHER CLASSIFICATION
Compute the amount of Cash and Cash Equivalents to be reported
on the balance sheet
ITEM AND AMOUNT

CASH, CASH EQUIVALENT, OR OTHER

Checking Account Balance - $925,000

Cash -

$925,000
Certificates of Deposits - $1,400,000

Temporary

Investments - $ 1,400,000
Cash Advance to Subsidiary - $980,000
Receivable (current)- $ 980,000
Bank Overdraft (one account at bank) - $17,000
Liability - $17,000

Current

Money market fund - $48,000

Cash -

$48,000
Cash restricted for future plant expansion - $500,000

Long-term

asset - $ 500,000
Coins and currency on hand - $1,350

Cash -

$1,350
Petty cash fund - $1,000

Cash -

$1,000
Savings Account Balance - $600,000

Cash -

$600,000
Treasury Bills - $180,000

Cash

Equivalent - $180,000
Post-dated check (after balance sheet date) - $5,000

Accounts

Receivable - $5,000
Travel advances for employees - $15,500
(current) - $15,500

Receivable

Certified check from customer - $9,800

$9,800

Cash -

TOTAL CASH AND CASH EQUIVALENTS = $1,765,150

EXAMPLE #2:
Sales Discounts - Gross vs. Net Method

Instruction:
Prepare the journal entries on Bolton Company books to record the sale and
receipt of payment from Arquette Company in # 1 - 3 below (treat each
independently), using both the gross and net methods of recording sales with
cash discounts.
1. On June 3rd, Bolton Company sold to Arquette Company merchandise
having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. On June 12th, the company received a check for the balance due
from Arquette Company.
Gross Method

Net

Method

6/3

6/12

2. On June 3rd, Bolton Company sold to Arquette Company merchandise

having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. Arquette Company did not remit the full payment until July 29th.
Gross Method
6/3

7/29

Net Method

3. On June 3rd, Bolton Company sold to Arquette Company merchandise

having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. Arquette Company paid for $1000 of the merchandise on June
12th but did not remit the full payment until July 29th.
Gross Method
6/3

6/12

7/29

Net Method

EXAMPLE #2: (Solution)

Sales Discounts - Gross vs. Net Method
Instruction:
Prepare the journal entries on Bolton Company books to record the sale and
receipt of payment from Arquette Company in # 1 - 3 below, using both the
gross and net methods of recording sales with cash discounts.
1. On June 3rd, Bolton Company sold to Arquette Company merchandise
having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. On June 12th, the company received a check for the balance due
from Arquette Company.
Gross Method

Net Method

6/3
A/R
Sales
6/1
2

2000
2000

A/R
Sales

Cash
1960
Discount
40
A/R
2000

Cash
A/R

1960
1960

1960
1960

2. On June 3rd, Bolton Company sold to Arquette Company merchandise

having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. Arquette Company did not remit the full payment until July 29th.
Gross Method

Net Method

6/3
A/R

2000
Sales

A/R
2000

1960
Sales

1960
7/2
9

Cash
A/R

Cash
2000
Discount Forfeited

2000
2000

40
A/R
1960

3. On June 3rd, Bolton Company sold to Arquette Company merchandise

having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping
point. Arquette Company paid for $1000 of the merchandise on June
12th but did not remit the full payment until July 29th.
Gross Method

Net Method

6/3
A/R

2000
Sales

A/R

1960

2000

Sales
1960

6/1
2
7/2
9

Cash
980
Discount
20
A/R
1000
Cash
A/R

Cash
A/R

980
980

Cash
1000
Discount Forfeited

1000
1000

20
A/R
980

EXAMPLE #3:
Recording Bad Debts
Roberts, Inc. reported the following financial information for 2010:
Dr.
Accounts Receivable
$250,000
Allowance for Doubtful Accounts
Sales (all on credit)
Sales Returns and Allowances 200,000

Cr.
$2,500
$900,000

The accounts receivable aging schedule for Roberts, Inc. appears as follows:
Age
Under 30 days old
30 60 days old
60 90 days old
Over 90 days old

Amoun
t
$150,000
70,000
25,000
5,000

% Uncollectible
5% (7500)
10% (7000)
15% (3750)
20% (1000)
= 19250

1. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts at 2% of net sales.

2. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts at 8% of accounts receivable.

3. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts using the aging method.

EXAMPLE #3: (Solution)

Recording Bad Debts
Roberts, Inc. reported the following financial information for 2010:
Dr.
Accounts Receivable
$250,000
Allowance for Doubtful Accounts
Sales (all on credit)
Sales Returns and Allowances 200,000

Cr.
$2,500
$900,000

The accounts receivable aging schedule for Roberts, Inc. appears as follows:
Age
Under 30 days old
30 60 days old
60 90 days old
Over 90 days old

Amoun
t
$150,000
70,000
25,000
5,000

% Uncollectible
5% (7500)
10% (7000)
15% (3750)
20% (1000)
= 19250

1. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts at 2% of net sales.
Bad Debt Expense
14,000
Allowance for Doubtful Accounts

14,000

Note the balance in the Allowance for Doubtful Accounts goes to

$16,500 (2,500 + 14,000)
2. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts at 8% of accounts receivable.
Bad Debt Expense
17500
Allowance for Doubtful Accounts

20000 2500 = 17500

17500

Note the balance in the Allowance for Doubtful Accounts goes to

$20,000 which is 8% of accounts receivable (2,500 + 17,500)

3. Prepare the journal entry to record bad debt expense assuming Roberts
Company estimates bad debts using the aging method.
Bad Debt Expense
16750
Allowance for Doubtful Accounts

19250 2500 = 16750

16750

Note the balance in the Allowance for Doubtful Accounts goes to

$19,250 which is the amount per the aging schedule (2,500 + 16,750)

EXAMPLE #4:
Recognition of Notes Receivable
1. Face Value: Bigelow Corp. lends Scandinavian Imports $10,000 in
exchange for a $10,000, three-year note bearing interest at 10 percent
annually. The market rate of interest for a note of similar risk is also 10
percent. How does Bigelow record the receipt of the note? What is the
entry to record interest revenue at the end of each year? What is the
entry when the note is paid off?

2. Discount (Zero-Interest Bearing):

Jeremiah Company receives a
three-year, $10,000 zero-interest-bearing note. The market rate of
interest for a note of similar risk is 9 percent. How does Jeremiah record
the receipt of the note? What is the entry to record interest revenue at the
end of each year? What is the entry when the note is paid off?
Hint a zero-interest bearing note does not have a regular interest
payment. The note is issued at a discount (below face value) and the
interest is the difference between the issue amount and the face value
(the amount paid at maturity). The interest should be amortized and
expensed over the life of the note.

3. Discount (Interest Bearing): Morgan Corp. makes a loan to Marie Co.

and receives in exchange a three-year, $10,000 note bearing interest at
10 percent annually. The market rate of interest for a note of similar risk is
12 percent. How does Morgan record the receipt of the note? What is the
entry to record interest revenue at the end of each year? What is the
entry when the note is paid off?

EXAMPLE #4: (Solution)

Recognition of Notes Receivable
1.

Face Value: Bigelow Corp. lends Scandinavian Imports $10,000 in

exchange for a $10,000, three-year note bearing interest at 10 percent
annually. The market rate of interest for a note of similar risk is also 10
percent. How does Bigelow record the receipt of the note? What is the
entry to record interest revenue at the end of each year? What is the
entry when the note is paid off?
PV Principal (N=3,I/YR=10,FV=10000) = 10,000 X .75132 =
$7513
PV Interest (N=3,I/YR=10,PMT=1000) = 1,000 X 2.48685 =
$2487
= $10000
Description
Dr

Accounts
Cr

To record receiptNote Receivable

10,000
Cash
10,000

To record interest
each year
1,000

Cash

To record pay off

Cash

1,000
Interest Rev.
10,000
Note Receivable

10,000

2.

Discount (Zero-Interest Bearing): Jeremiah Company receives a

three-year, $10,000 zero interest-bearing note. The market rate of
interest for a note of similar risk is 9 percent. How does Jeremiah
record the receipt of the note? What is the entry to record interest
revenue at the end of each year? What is the entry when the note is
paid off?
Hint a zero-interest bearing note does not have a regular interest
payment. The note is issued at a discount (below face value) and the
interest is the difference between the issue amount and the face value
(the amount paid at maturity). The interest should be amortized and
expensed over the life of the note.
PV Principal (N=3,I/YR=9,FV=10000) = 10,000 X .77218 =
$7721.80
Description
Dr

Accounts
Cr

To record receiptNote Receivable

10,000
Discount on Note

2,278.20
Cash
7,721.80
-----------------------To record interest
694.96
yr 1
694.96

Discount on Note
Interest Rev.
(7,721.8 *.09 = 694.96)

To record interest
757.51
yr 2
757.51

Discount on Note
Interest Rev.
(8,416.76 * .09 = 757.51)

To record interest
825.73
yr 3
825.73

Discount on Note
Interest Rev.
(9,174.27 * .09 = 825.73)

-----------------------To record pay off

Cash

10,000
Note Receivable

10,000
==========================================
==========================
Amortization Schedule
Cash

Interest

Discount

Note
Date
Received
Revenue
Amortized
Carrying Value
Issue date
7,721.80
End yr 1
0
694.96
694.96
8,416.76
End yr 2
0
757.51
757.51
9,174.27
End yr 3
0
825.73
825.73
10,000.00
3.
Discount (Interest Bearing): Morgan Corp. makes a loan to Marie
Co. and receives in exchange a three-year, $10,000 note bearing
interest at 10 percent annually. The market rate of interest for a note of
similar risk is 12 percent. How does Morgan record the receipt of the
note? What is the entry to record interest revenue at the end of each
year? What is the entry when the note is paid off?
PV Principal (N=3,I/YR=12,FV=10000) = 10,000 X .71178 =
$7117.83
PV Interest (N=3,I/YR=12,PMT=1000) = 1,000 X 2.40183 =
$2401.80
= $9519.63
Description
Dr

Accounts
Cr

To record receiptNote Receivable

10,000

Discount on Note
480.37
Cash
9,519.63
-------------------------To record interest
Cash
Yr 1
Discount on Note

1,000.00
142.46
Interest Rev.

1,142.46
(9,519.63 *.12 = 1,142.46)
To record interest
Cash
Yr 2
Discount on Note

1,000.00
159.44
Interest Rev.

1,159.44
(9,661.99 *.12 = 1,159.44)
To record interest
Cash
Yr 3
Discount on Note

1,000.00
178.57
Interest Rev.

1,178.57
(9,821.43 *.12 = 1,178.57)
-----------------------To record pay off

Cash

10,000
Note Receivable

10,000
==========================================
==========================
Amortization Schedule
Cash

Interest

Discount

Note
Date
Received
Revenue
Carrying Value
Issue date
End yr 1
1,000.00
1,142.36
142.36
9,661.99
End yr 2
1,000.00
1,159.44
159.44
9,821.43
End yr 3
1,000.00
1,178.57
178.57
10,000.00
EXAMPLE #5:
Secured Borrowing

Amortized
9,519.63

1. On October 1, 2010, Chung, Inc. assigns $1,000,000 of its accounts

receivable to Seneca National Bank as collateral for a $750,000 note. The
bank assesses a finance charge of 2% of the receivables assigned and
interest on the note of 9%. Prepare the October 1 journal entries for both
Chung and Seneca.

2. On April 1, 2010, Prince Company assigns $500,000 of its accounts

receivable to the Third National Bank as collateral for a $300,000 loan due
July 1, 2010. The assignment agreement calls for Prince Company to
continue to collect the receivables. Third National Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10%.
Prince collects $350,000 of the accounts receivable on June 30, 2010
and pays off the note to Third on July 1, 2010. Record the journal entries
for Prince only.
4/1

6/30

7/1

EXAMPLE #5: (Solution)

Secured Borrowing
1. On October 1, 2010, Chung, Inc. assigns $1,000,000 of its accounts
receivable to Seneca National Bank as collateral for a $750,000 note. The
bank assesses a finance charge of 2% of the receivables assigned and
interest on the note of 9%. Prepare the October 1 journal entries for both
Chung and Seneca.
C

Cash
730000
Interest Expense 20000
(2% x 1000000 = 20000)
Notes Payable
750000

Notes Receivable750000
Cash
730000
Interest Revenue 20000

2. On April 1, 2010, Prince Company assigns $500,000 of its accounts

receivable to the Third National Bank as collateral for a $300,000 loan due
July 1, 2010. The assignment agreement calls for Prince Company to
continue to collect the receivables. Third National Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10%.
Prince collects $350,000 of the accounts receivable on June 30, 2010
and pays off the note to Third on July 1, 2010. Record the journal entries
for Prince only.
4/1

Cash
290000
Interest Expense 10000
(2% x 500000 = 10000)
Notes Payable
300000

6/30 Cash
7/1

350000
Accounts Receivable

Notes Payable 300000

Interest Expense 7500
Cash

350000
(10% x 300000 x 3/12 = 7500)

307500

EXAMPLE #6:
Sales of Receivables
Jedd Hale Corporation factors $90,000 of accounts receivable with KS
Financing, Inc. KS Financing will collect the receivables. A finance charge of
4% of receivables is assessed by KS Financing and 6% of the receivables are
retained to cover probable adjustments.
1. Prepare the journal entry for Jedd Hale to record the sale of receivables,
assuming that the receivables were transferred on a without
recourse basis.

2. Prepare the journal entry for Jedd Hale to record the sale of receivables,
assuming that the receivables were transferred on a with recourse
basis and the recourse obligation has a fair value of $2,000.

Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial

Factors, Inc., who assesses a finance charge of 3% of the amount of accounts
receivable and retains an amount equal to 5% of the accounts receivable (for
probable adjustments).
3. Prepare the journal entry for Crest to record the sale of receivables,
assuming that the receivables were transferred on a without
recourse basis.

4. Prepare the journal entry for Crest to record the sale of receivables,
assuming that the receivables were transferred on a with recourse
basis and the recourse obligation has a fair value of $6,000.

EXAMPLE #6: (Solution)

Sales of Receivables
Jedd Hale Corporation factors $90,000 of accounts receivable with KS
Financing, Inc. KS Financing will collect the receivables. A finance charge of
4% of receivables is assessed by KS Financing and 6% of the receivables are
retained to cover probable adjustments.
5. Prepare the journal entry for Jedd Hale to record the sale of receivables,
assuming that the receivables were transferred on a without
recourse basis.
Cash
81000
Due from factor
5400
(90000 x 6%)
Loss on sale of receivable 3600
(90000 x 4%)
A/R
90000
6. Prepare the journal entry for Jedd Hale to record the sale of receivables,
assuming that the receivables were transferred on a with recourse
basis and the recourse obligation has a fair value of $2,000.
Cash
81000
Due from factor
5400
(90000 x 6%)
Loss on sale of receivable 5600
(90000 x 4% + 2000)
A/R
90000
Recourse Liability
2000
Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial
Factors, Inc., who assesses a finance charge of 3% of the amount of accounts
receivable and retains an amount equal to 5% of the accounts receivable (for
probable adjustments).
7. Prepare the journal entry for Crest to record the sale of receivables,
assuming that the receivables were transferred on a without
recourse basis.
Cash
460000
Due from factor
25000
(500000 x 5%)
Loss on sale of receivable15000
(500000 x 3%)
A/R
500000
8. Prepare the journal entry for Crest to record the sale of receivables,
assuming that the receivables were transferred on a with recourse
basis and the recourse obligation has a fair value of $6,000.
Cash
460000
Due from factor
25000
(500000 x 5%)
Loss on sale of receivable21000
(500000 x 3% + 6000)

A/R
Recourse Liability

500000
6000