Chapter 07 Answers

CHAPTER 7
Receivables Part I
Questions
Q7-1.
Credit terms 2/10, n/30 means a 2% cash discount is granted if payment is

made within 10 days from date of sale; the full amount is due within 30 days.
The journal entry is:
Net Approach*
Gross Approach
Accounts receivable............................
4,900
5,000
Sales revenue...............................
4,900
5,000
* P5,000 x 0.98 = P4,900.
The net approach is preferable because it correctly (a) measures the receivable
and sales revenue and (b) records interest revenue.
Q7-2.
The entry to write off an account considered uncollectible is:

Allowance for doubtful accounts..........................
Accounts receivable (name)...........................
xxxx
xxxx
The entry for collection of an account previously written off as bad debt:
*Accounts receivable (name)................................
Allowance for doubtful accounts...................
xxxx
Cash.......................................................................
Accounts receivable (name)...........................
xxxx
xxxx
xxxx
These entries will cause the debtors account to reflect details of all
transactions and events affecting the account. Such information may be useful
in future dealings with the customer. The reverse entry (* above) also has the
advantage of assembling the bad debt history of the customer in the account
receivable.
Q7-3.
A cash discount relates to accounts receivable. Payment within the discount

period reduces the amount paid. A trade discount is a way (a) to change the
sale price without changing a price list or catalog or (b) to reduce the sale price
for high quantity purchases or sales. Trade discounts are not separately
accounted for but rather serve to define the invoice price.
7-2
Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)
Q7-4.
When accounts have credit balances, the amount is included with the debit
balances of the other customers accounts if immaterial in amount. If the
amount is material, separate recognition under liabilities is called for: Credit
Balances of Customers Accounts is a suitable title.
Q7-5.
A note receivable is an unconditional written agreement to receive a certain

sum of money on a specific date. Notes receivable have two attributes not
found in accounts receivable: (1) They are negotiable instruments, which
means that they are legally and readily transferable among parties and may be
used to satisfy debts by the holders of these instruments, and (2) They usually
involve interest.
Q7-6.
A non-interest-bearing note is a note that does not specify an interest rate. For
a short-term non-interest-bearing note, the maturity value is listed as the face
value, and includes both principal and implicit interest. Therefore, the note is
initially recorded at its maturity value, the total interest to be earned over the
life of the note is recorded as Interest Revenue, and Sales is credited for the
difference. If the fiscal period ends prior to collection of the note an adjusting
entry must be made to reduce the interest revenue and establish a contra-asset
account for any unearned interest. In contrast, for a short-term interest bearing
note, the Note Receivable account is recorded at the face value of the note.
After issuance, interest revenue is recorded as earned and is determined by
multiplying the principal by the stated interest rate for the time the note has
been outstanding.
Q7-7.
Notes receivable discounted are customer notes receivable that a company has
transferred to a bank with recourse in exchange for cash. The customer is
notified to pay the bank directly at the maturity date and the company
guarantees payment of the note if the customer defaults. During the interim
period between the discount date and the maturity date, the note represents a
contingent liability to the company. This contingent liability is disclosed in a
separate contra account entitled Notes Receivable Discounted. This account is
offset against Notes Receivable on any statement of financial position
prepared prior to the notes maturity date.
Q7-8.
When a note receivable is discounted, the cash proceeds are determined by

multiplying the discount rate times the maturity value of the note (face value
of the note plus total interest) for the discount period, and then deducting the
resulting discount from the maturity value.
Q7-9.
Interest Bearing Noninterest Bearing

Principal.............................................. P5,000
P5,000
Interest rate.........................................
12%
12%
Face of note......................................... P5,000
P5,600 (interest
included in face)
Receivables Part I
Interest amount...................................
600
7-3
600
Journal entries:
Date received:
Note receivable............................
Sales.........................................
Date collected:
Cash (principal + interest)...........
Note receivable........................
Interest revenue.......................
5,000
5,000*
5,000
5,600
5,000
5,600**
5,000
600
5,000
600
* Recorded at net; could be recorded as follows:

Note receivable...................................................................
Unearned interest revenue (or Discount on
note receivable)...........................................................
Sales revenue...................................................................
5,600
600
5,000
**If the alternative recording were used, collection is recorded as:

Cash....................................................................................
Unearned interest revenue (or Discount on
note receivable)...............................................................
Note receivable...............................................................
Interest revenue...............................................................
Q7-10.
5,600
600
5,600
600
To compute cash proceeds:

Principal of the note..........................................................
Total interest at maturity (P1,000 x 9% x 3/12)...............
Total maturity value (subject to the discount rate)...........
Interest charged by the new payee (P1,022.50
x 12% x 1/12)..............................................................
Cash proceeds...................................................................
P1,000.00
22.50
1,022.50
10.23
P1,012.27
To compute loss:
Carrying value of the debt [P1,000 + (P1,000 x 9%
x 2/12 = P15)]...............................................................
Cash proceeds...................................................................
Loss on sale of note..........................................................
P1,015.00
1,012.27
P
2.73
Entries:
Interest receivable.....................................................
Interest revenue.................................................
15.00
15.00
7-4

Cash..........................................................................
Loss on sale of note receivable.................................
Note receivable..................................................
Interest receivable..............................................
Q7-11.
Cash (given)........................................................................
Loss on sale of accounts receivable....................................
Allowance for doubtful accounts (given)...........................
Accounts receivable (given)............................................
Recourse obligation.........................................................
1,012.27
2.73
1,000.00
15.00
9,000
1,400
300
10,000
700
Q7-12.
The basic problems that relate to the valuation of receivables are (1) the
determination of the face value of the receivable, (2) the probability of future
collection of the receivable, and (3) the length of time the receivable will be
outstanding. The determination of the face value of the receivable is a function
of the trade discount, cash discount, and certain allowance accounts such as the
Allowance for Sales Returns and Allowances.
Q7-13.
A major part of accounting is the measurement of financial data. Changes in

values should be recognized as soon as they are measurable in objective terms
in order for accounting to provide useful information on a periodic basis.
The very existence of accounts receivable is based on the decision that a credit
sale is an objective indication that revenue should be recognized. The
alternative is to wait until the debt is paid in cash. If revenue is to be
recognized and an asset recorded at the time of a credit sale, the need for
fairness in the statements requires that both expenses and the asset be adjusted
for the estimated amounts of the asset that experience indicates will not be
collected.
The argument may be persuasive that the evidence supporting write-offs
permits a more accurate decision than that which supports the allowance
method. The latter method, however, is objective in the sense in which
accountants use the term and is justified by the need for fair presentation of
receivables and income. The direct write-off method is not wholly objective; it
requires the use of judgment in determining when an account has become
uncollectible.
Q7-14.
Imputed interest is the interest ascribed or attributed to a situation or

circumstance which is void of a stated or otherwise appropriate interest factor.
Imputed interest is the result of a process of interest rate estimation called
Receivables Part I
7-5
imputation.
An interest rate is imputed for notes receivable when (1) no interest rate is stated
for the transaction, or (2) the stated interest rate is unreasonable, or (3) the
stated face amount of the note is materially different from the current cash
price for the same or similar items or from the current market value of the debt
instrument.
In imputing an appropriate interest rate, consideration should be given to the
prevailing interest rates for similar instruments of issuers with similar credit
ratings, the collateral, and restrictive covenants.
Q7-15.
The fair value option gives companies the option of using fair value as the
measurement basis for financial instruments. The IASB believes that fair value
measurement for financial instruments provides more relevant and
understandable information than historical cost. If companies choose the fair
value option, the receivables are recorded at fair value, with unrealized gains
or losses reported as part of net income.
Exercises
E7-1.
Requirement 1
Accounts receivable, trade.................................................. 156,000
Note receivable, long-term................................................. 80,000
Accounts receivable - others (loans to employees)............
2,200
Accounts receivable (dishonored note)............................... 22,000
Prepaid insurance................................................................
1,200
Accounts payable, trade..............................................
Allowance for doubtful accounts.................................
Cash dividends payable...............................................
Wages payable.............................................................
Rent revenue collected in advance..............................
Mortgage payable, long-term......................................
Receivables and payables............................................
62,000
4,000
24,000
2,400
1,600
40,000
127,400
Requirement 2
Current assets:
Accounts receivable, trade........................................... 156,000
Less allowance for doubtful accounts.........................
4,000
Receivables from employees.......................................
152,000
2,200
7-6

Prepaid insurance........................................................
Investments and funds:
Notes receivable, long-term.........................................
Other assets:
Accounts receivable (dishonored note).......................
Current liabilities:
Accounts payable, trade..............................................
Cash dividends payable...............................................
Wages payable.............................................................
Rent revenue collected in advance..............................
Long-term liabilities:
Mortgage payable........................................................
E7-2.
1,200
80,000
22,000
62,000
24,000
2,400
1,600
40,000
Requirement 1
2014
Dec.
8
18
Dec. 31
Accounts Receivable
Sales
9,000
Cash
Sales Discounts Taken
Accounts Receivable
3,920
80
Cash
Accounts Receivable
3,000
9,000
4,000
3,000
Requirement 2
2014
Dec.
Dec. 18
31
Accounts Receivable
[P9,000 (0.2 x P9,000)]
Sales
8,820
8,820
Cash (P4,000 x 0.98)

Accounts Receivable
3,920
Cash
Accounts Receivable
(P3,000 P60)
Sales Discounts Not Taken
(P3,000 x 0.02)
3,000
3,920
2,940
60
Receivables Part I
31
E7-3.
Accounts Receivable
Sales Discounts Not Taken
[(P9,000 P4,000 P3,000)
x 0.02]
To adjust for lost discount at the end
of the year.
7-7
40
40
Requirement 1
(A) Net Approach
a.
b.
a.
b.
To record the sale:

2014:
Accounts receivable.................................
Sales revenue.....................................
P20,000 x 0.97 = P19,400
To record collection:
Assumption A on Jan. 5, 2015; within
discount period:
Cash..........................................................
Accounts receivable..........................
Assumption B on April 1, 2015; after
discount period:
Cash..........................................................
Sales discounts forfeited...................
(B) Gross Approach
To record the sale:
2014:
Accounts receivable.................................
Sales revenue.....................................
To record collection:
Assumption A on Jan. 5, 2015; within
discount period:
Cash..........................................................
Sales discounts.........................................
19,400
19,400
19,400
19,400
20,000
600
19,400
20,000
20,000
19,400
600
20,000
7-8

Assumption B on April 1, 2015; after
discount period:
Cash..........................................................
20,000
20,000
Requirement 2
December 31, 2014:
Statement of financial position:
Accounts receivable...........
P19,400
Income Statement:
Sales revenue...................... 19,400
December 31, 2015:
Statement of financial position
0
Income Statement:
Assumption A.....................
Assumption B:
Sales discounts forfeited...
E7-4.
P20,000
20,000
0 Sales discounts......................
(600)
600
Requirement 1
2014
Dec.
1
22
Accounts Receivable
Sales
Sales Returns and Allowances
Accounts Receivable
7,000
7,000
200
200
Requirement 2
2014
Dec.
Dec. 22
31
Accounts Receivable
Sales
Allowance for Sales Returns
and Allowances
Accounts Receivable
Sales Returns and Allowances
(P7,000 x 0.04)
Allowance for Sales Returns
7,000
7,000
200
200
280
Receivables Part I
and Allowances
7-9
280
Requirement 3
(a) If sales returns and allowances are recorded as they occur, sales returns
and allowances of P200 will appear on the income statement, and accounts
receivable will be reduced by P200 on the statement of financial position.
(b) If returns are estimated in the period of sale, the P80 remaining in the
Allowance for Sales Returns and Allowances account will be deducted
from accounts receivable on the statement of financial position. The P280
balance in the Sales Returns and Allowances account will appear on the
income statement as a deduction from sales revenue.
E7-5.
E7-6.
(a) Bad debt expense

Allowance for doubtful accounts
P2,000 + P10,000 = P12,000
(b) Allowance for doubtful accounts
Accounts receivable
Requirement 1
2014
Dec. 11
Notes Receivable
Cash
31
2015
Jan.
Feb.
1
9
Interest Receivable (P12,000 x

0.12 x 20/360)
Interest Revenue
Interest Revenue (reversing entry)

Interest Receivable
Cash
Interest Revenue (P12,000 x
0.12 x 60/360)*
Notes Receivable
12,000
12,000
5,000
5,000
12,000
12,000
80
80
80
80
12,240
240
12,000
* In the event the December 31, 2014

entry was not reversed, the following
journal entry would be made on
February 9:
Feb.
Cash
Interest Receivable
0.12 x 40/360)
12,240
80
160
7-10

Notes Receivable
12,000
Requirement 2
2014
Dec. 11
Notes Receivable
0.12 x 60/360)
Cash
31
2015
Jan.
Feb.
1
9
12,000
240
11,760
Interest Revenue [P240

(P12,000 x 0.12 x 20/360)]
Discount on Notes Receivable
160
160
Discounts on Notes Receivable

Interest Revenue (reversing entry)
Cash
Notes Receivable
160
160
12,000
12,000
E7-7.
Face value of note
Interest to maturity
Maturity value
Discount
Proceeds
(1)
P8,000
0
P8,000
(120) a
P7,880
P8,000 x 0.12 x (60 15) / 360

P12,000 x 0.12 x 60/360
c
P12,240 x 0.14 x (60 30) / 360
d
P6,000 x 0.10 x 90/360
E7-8.
(2)
P12,000.00
240.00 b
P12,240.00
(142.80)
P12,097.20
June 30
July 15
30
30
(3)
P6,000
150
P6,150
(123)
P6,027
P6,150 x 0.12 x (90 30) / 360

P10,000 x 0.12 x 120/360
g
P10,400 x 0.15 x (120 45) / 360
Notes Receivable - Buttercup

Sales
5,000.00
Notes Receivable Dollie

Accounts Receivable
6,000.00
5,000.00
6,000.00
Interest Receivable
(P45.83c + P25f)
Interest Revenue
*
(4)
P10,000
400 f
P10,400
(325)g
P10,075
70.83
70.83
#
Cash (P5,034.75 + P6,008.50 )
11,043.25
Receivables Part I
Loss from Discounting of Notes
(P11.08 + P16.50)
Notes Receivable Discounted
Interest Receivable
Face value of note

Maturity value of note
Discount
Proceeds
Book value of note
Loss from discounting of note
7-11
27.58
11,000.00
70.83
Buttercup*
P5,000.00
137.50 a
P5,137.50
(102.75) b
P 5,034.75
(5,045.83) c
P (11.08)
Dollie#
P6,000.00
100.00
P6,100.00
(91.50)
P6,008.50
(6,025.00)
P (16.50)
P5,000 x 0.11 x 90/360

P5,137.50 x 0.12 x (90 30) / 360
c
P5,000 face value + P45.83 (P5,000 x 0.11 x 30/360) accrued interest revenue
d
P6,000 x 0.10 x 60/360
e
P6,100 x 0.12 x (60 15) / 360
f
P6,000 face value + P25 (P6,000 x 0.10 x 15/360) accrued interest revenue
b
Sept. 15
30
E7-9.

Notes Receivable
Notes Receivable Dishonored
(P5,000 + P137.50 + P10)
Notes Receivable
Cash [P5,000 + (P5,000 x
0.11 x 90/360) + P10]
6,000.00
6,000.00
5,147.50
5,000.00
5,000.00
5,147.50
Requirement (a)
Face value of note.............................................................
Interest to maturity (P36,000 x 0.12 x 90/360)................
Maturity value of note......................................................
Discount (P37,080 x 0.15 x 75/360).................................
Proceeds............................................................................
Requirement (b)
P36,000.00
1,080.00
P37,080.00
1,158.80
P35,921.20
7-12

Notes Receivable Dishonored (P37,080 + P75)...
Notes Receivable Discounted...............................
Notes Receivable...........................................
Cash...............................................................
E7-10.
Interest revenue =
Loss on sale of note
37,185
36,000
36,000
37,185
P75 (P20,000 x 0.09 x 15/360)

= P79.50

Discount (P20,300 x 0.12 x 45/360).................................
Proceeds............................................................................
Book value of note (P20,000 + P75)................................
E7-11.
P20,000.00
300.00
P20,300.00
304.50
P19,995.50
20,075.00
P
79.50
Requirement (a)
Notes Receivable..................................................
Accounts Receivable.....................................
5,000
5,000
Requirement (b)
Discount (P5,200 x 0.15 x 90/360)...................................
Proceeds............................................................................
Accrued interest revenue: P50.00
(P5,000 x 0.12 x 30/360)
Book value of note (P5,000 + P50)..................................
P5,000
200
P5,200
195
P5,005
5,050
P 45
Interest Receivable................................................
Interest Revenue............................................
50
Cash......................................................................
Loss on Sale of Note.............................................
Notes Receivable Discounted........................
Interest Receivable........................................
5,005
45
50
5,000
50
Receivables Part I
7-13
Requirement (c)
Notes Receivable Dishonored...............................
Notes Receivable Discounted...............................
Notes Receivable...........................................
Cash [P5,000 + (P5,000 x 0.12 x
120/360) + P75]..........................................
E7-12.
5,275
5,000
5,000
5,275
Requirement 1
(1) Accounts Receivable
Sales
881,200
(2) Cash
Accounts Receivable
841,000
881,200
841,000
(3) Allowance for Doubtful Accounts

Accounts Receivable
13,800
(4) Cash
Notes Receivable
29,000
(5) Notes Receivable

Accounts Receivable
74,000
(6) Notes Receivable Discounted

Notes Receivable
36,000
(7) Notes Receivable Dishonored

Notes Receivable
Cash
2,025
2,000
(8) Interest Receivable

Interest Revenue
Cash
Interest Receivable
13,800
29,000
74,000
36,000
2,000
2,025
200
200
45,075
125
45,000
200
7-14

(9) Accounts Receivable
Allowance for Doubtful Accounts
500
500
Cash
Accounts Receivable
500
500
(10) Sales Returns and Allowances

Accounts Receivable
2,000
2,000
(11) Bad Debt Expense (P881,200 x 1.5%)

13,218
13,218
Requirement 2
Accounts Receivable
6/30/03 bal. 224,000 (2)
(3)
(9)
500 (5)
(9)
(10)
6/30/04. bal. 174,400
Notes Receivable
6/30/03 bal. 59,800
(4)
(5)
74,000
(6)
(7)
6/30/04 bal. 66,800
841,000
13,800
74,000
500
2,000

(3)
13,800 6/30/03 bal. 14,100
(9)
500
(11)
13,218
6/30/04 bal. 14,018
29,000 (6)
36,000 (7)
2,000
Notes receivable P 66,800

Less: Notes receivable discounted
(45,000)
Accounts receivable
Less: Allowance for doubtful accounts
Total receivables
E7-13.
May
May
1
6
11

36,000
6/30/03 bal. 38,000
2,000
(8)
45,000
6/30/04 bal. 45,000
P 21,800
P174,400
(14,018)
Notes Receivable: Reyes

Accounts Receivable (or Sales)
7,000.00
Notes Receivable: Santos

Accounts Receivable
9,000.00
Interest Receivable
(P23,33c + P12.50f)
160,382
P182,182
7,000.00
9,000.00
35.83
Receivables Part I
Interest Revenue
11
35.83
Cash (P7,001.71* + P8,913.79#

P9,700g)
Interest Expense
(P21.62 + P98.71)
Notes Payable
Interest Receivable
Face value of note

Maturity value of note
Discount
Proceeds
Book value of note
Loss from discounting of note
7-15
25,615.50
300.00 g
120.33
Reyes*
P7,000.00
210.00
P7,210.00
(208.29)
P7,001.71
(7,023.33)
P (21.62)
16,000.00
10,000.00
35.83
Santos#
P7,000.00
300.00 d
P9,300.00
(386.21) e
P8,913.79
(9,012.50) f
P (98.71)
P7,000 x 0.12 x 90/360

P7,210 x 0.13 x (90 10) / 360
c
d
P9,000 x 0.10 x 120/360
e
P9,300 x 0.13 x (120 5) / 360
f
g
P9,000 face value P300 (P10,000 x 0.12 x 90/360) interest expense
b
7-16

July 31
Aug. 10
Sept.
Sept. 23

Notes Receivable: Reyes
7,000.00
7,000.00
Notes Payable
Cash
10,000.00
10,000.00

(P9,000 + P300 + P10)
Notes Receivable: Santos
Cash
9,310.00
8,000.00
8,000.00
9,310.00
Cash (P9,310 + P56.89)

Interest Revenue
(P9,310 x 0.11 x 20/360)*
9,366.89
56.89
9,310.00
* The Santos note matured on

September 3. From September 3
to September 23 is a 20 day time
period.
E7-14.
Balance 1/1 (P700 P255)

4/12 (#2412) (P1,710 P1,000
P 445
Over one year
310
Eight months and 19 days
750
One month and 13 days
P400*)
11/18 (#5681) (P2,000 P1,250)
P1,505
*(P890 P490)
Inasmuch as later invoices have been paid in full, all three of these amounts should
be investigated in order to determine why Alstott Co. has not paid them. The
amounts in the beginning balance and #2412 should be of particular concern.
Problems
P7-1.
Requirement 1
Allowance for doubtful accounts..................................
Accounts receivable..............................................
Balances remaining:
1,050
1,050
Receivables Part I
Accounts receivable, P18,050 P1,050 = P17,000.
Allowance for doubtful accounts, P900 P1,050 = P150 debit.
Requirement 2
Bad debt expense...................
Allowance for doubtful
accounts...........................
Assumption a
450
575
Assumption b
480
575
480
Computations:
Assumption (a) on total receivables at year-end:

Balance required in allowance account, P17,000 x 2 %....... P425
Balance existing in allowance account (debit)........................ 150
Increase (credit) required......................................................... P575
Assumption (b) on aging schedule:
Not past due......................................... P10,000 x % =
Past due 1 60 days.............................
4,000 x 1% =
Past due over 60 days..........................
3,000 x 8% =
Balance required in allowance account................................
Balance existing in allowance account (debit).....................
Increase (credit) required.....................................................
P 50
40
240
330
150
P480
Requirement 3
Assumption
a
Current assets:
Accounts receivable...............17,000
17,000
Less: Allowance for
doubtful accounts............... 425 P16,575 330 P16,670
P7-2.
Requirement 1
April 15, 2014 Sale of merchandise on credit:
Accounts receivable (P18,000 x 0.98)........... 17,640
Sales revenue..........................................
May 1, 2014 Note received in settlement of account:
17,640
7-17
7-18

Note receivable.............................................. 18,000
Interest revenue (P18,000 P17,640)....
Account receivable.................................
December 31, 2014 Adjusting entry:
Interest receivable (P18,000 x 15% x 8/12)...
Interest revenue.......................................
360
17,640
1,800
1,800
April 30, 2015 Collection of note and interest:

Cash [P18,000 + (P18,000 x 15%)]............... 20,700
Note receivable.......................................
Interest receivable (per above and
no reversing entry)...........................
Interest revenue (P18,000 x 15%
x 4/12)...................................................
18,000
1,800
900
Requirement 2
P7-3.
Income statement:
Sales revenue.................................................
Interest revenue (P360 + P1,800)..................
P17,640
2,160

Note receivable..............................................
Interest receivable..........................................
18,000
1,800
Requirement 1
May 1, 2014 To record sale and noninterest bearing note:
Notes receivable (PV = P26,400 1.10)....... 24,000
Sales revenue..........................................
24,000
This note could be recorded at gross with the same end results.
December 31, 2014 Adjusting entry for interest:
Notes receivable.............................................
x 8/12)..................................................
1,600
April 30, 2015 Collection of face of the note:

Cash............................................................... 26,400
Note receivable.......................................
1,600
25,600
Receivables Part I
x 4/12)...................................................
7-19
800
Requirement 2
P7-4.
Income statement:
Sales revenue.................................................
Interest revenue..............................................
P24,000
1,600

Note receivable..............................................
25,600
May 1, 2014 To record sale of merchandise:

Accounts receivable (2/10; n/EOM).............. 39,200
Sales revenue (P40,000 x 0.98)..............
39,200
June 1, 2014 To record note received:

Notes receivable............................................. 40,000
Accounts receivable................................
Interest revenue (cash discount
earned, P40,000 P39,200).................
August 1, 2014 To record discounting (sale) of note:
a. Interest earned for June and July:
Interest receivable (P40,000 x 12% x 2/12).....
800
b.
Discounting:
Cash (see computation below).......................... 40,421
Loss on sale of note (see computation below). .
379
Note receivable.......................................
Interest receivable...................................
Computation of cash proceeds and loss:

Maturity value of note: P40,000 x [1 + (1/2 x 12%)] =
Discount to bank: P42,400 x 4/12 x 14%
=
Proceeds
=
Loss on note:
Cash proceeds.........................................................
Carrying value of the note (P40,000 + P800).........
39,200
800
800 *
40,000
800
P42,400
(1,979)
P40,421
P40,421
40,800
7-20

Loss on sale of note receivable........................
379
* These amounts often are offset; in this instance, to interest revenue of P800
P379 = P421.
November 30, 2014 Maturity date:
No entry required because the note was collected in full.
P7-5.
February 1, 2014 To record sale of land and note received:

Note receivable.............................................. 200,000
Land........................................................
Gain on sale of land................................
March 1, 2014 Discounted (sold) note receivable:
a. Interest earned for February:
Interest receivable (or Note receivable)
(P200,000 x 9% x 1/12).............................. 1,500
b.
Discounting:
Cash............................................................... 198,550
Loss on sale of note (computed below)......... 2,950 *
Note receivable.......................................
Interest receivable (P200,000 x 9%
x 1/12)..................................................
60,000
140,000
1,500
200,000
1,500
Computation of cash proceeds and gain (loss):

Maturity amount:
Principal.........................................................................
Interest (P200,000 x 9% x 6/12)....................................
Total subject to interest.............................................
Interest charged by bank (P209,000 x 12% x 5/12).......
Cash proceeds................................................................
P200,000
9,000
209,000
10,450
P198,550
Loss on note:
Cash proceeds................................................................
Carrying value of the note (P200,000 + P1,500)...........
Loss on sale of note receivable...............................
P198,550
201,500
P 2,950
* The interest revenue and loss as computed above often are offset; in this
instance the net loss would be P2,950 P1,500 = P1,450.
Receivables Part I
7-21
July 31, 2014 Maturity date:

CASE A No entry because Acropolis Company paid the note in full.
CASE B Special receivable, dishonored note.............
Cash (P200,000 + P9,000 + P1,000)........
P7-6.
210,000
210,000
Requirement 1 Imputed interest:

Principal Rents = (PVA, ?%, 3) (Table A-4)
P30,000 P13,798 = 2.17423
Reference to Table A-4 for n = 3 shows the interest rate to be approximately
18%.
Requirement 2 Collection Schedule:
Date
Cash Collection
01-01-2014
12-31-2014
12-31-2015
12-31-2016
Note received
P13,798
13,798
13,798
P41,394
Interest Revenue (18%)
Note Receivable
Balance
Reductio
P30,000 x 18% = P 5,400

P 8,398
21,602 x 18% = 3,888
9,910
11,692 x 18% = 2,106 *
11,692
P11,394
P30,0
P30,000
21,602
11,692
0
00
* Rounded
Requirement 3
Entries:
January 1, 2014 Sold truck:
Cash............................................................... 9,995
Note receivable.............................................. 30,000
Sales revenue..........................................
39,995
December 31:
2014
2015
2016
Cash.......................................13,798
13,798
13,798
Interest revenue..................
5,400
3,888
2,106
Note receivable..................
8,398
9,910
11,692
7-22
Multiple Choice Questions

MC7 - 1.
2.
3.
4.
5.
D
B
D
C
D
MC7 -21.
22.
23.
24.
25.
C
D
A
D
B
MC7-41.
42.
43.
44.
45.
D
B
D
C
B
MC7 -61.
62.
63.
64.
65.
A
C
D
A
C
6.
7.
8.
9.
10.
C
C
B
D
C
26.
27.
28.
29.
30.
A
B
A
D
A
46.
47.
48.
49.
50.
C
A
D
D
A
66.
67.
C
D
11.
12.
13.
14.
15.
B
D
D
A
C
31.
32.
33.
34.
35.
B
D
A
A
B
51.
52.
53.
54.
55.
C
A
A
A/B
D
16.
17.
18.
19.
20.
D
C
B
D
D
36.
37.
38.
39.
40.
D
D
C
B
B
56.
57.
58.
59.
60.
A
B
C
D
C

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CHAPTER 7

Credit terms 2/10, n/30 means a 2% cash discount is granted if payment is

The entry to write off an account considered uncollectible is:

A cash discount relates to accounts receivable. Payment within the discount

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

A note receivable is an unconditional written agreement to receive a certain

When a note receivable is discounted, the cash proceeds are determined by

Interest Bearing Noninterest Bearing

* Recorded at net; could be recorded as follows:

**If the alternative recording were used, collection is recorded as:

To compute cash proceeds:

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

A major part of accounting is the measurement of financial data. Changes in

Imputed interest is the interest ascribed or attributed to a situation or

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

Cash (P4,000 x 0.98)

To record the sale:

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

(a) Bad debt expense

Interest Receivable (P12,000 x

Interest Revenue (reversing entry)

* In the event the December 31, 2014

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

Interest Revenue [P240

Discounts on Notes Receivable

P8,000 x 0.12 x (60 15) / 360

P6,150 x 0.12 x (90 30) / 360

Notes Receivable - Buttercup

Notes Receivable Dollie

Cash (P5,034.75 + P6,008.50 )

Face value of note

P5,000 x 0.11 x 90/360

Notes Receivable Discounted

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

P75 (P20,000 x 0.09 x 15/360)

Face value of note.............................................................

(3) Allowance for Doubtful Accounts

(5) Notes Receivable

(6) Notes Receivable Discounted

(7) Notes Receivable Dishonored

(8) Interest Receivable

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

(10) Sales Returns and Allowances

(11) Bad Debt Expense (P881,200 x 1.5%)

Allowance for Doubtful Accounts

Notes receivable P 66,800

Notes Receivable Discounted

Notes Receivable: Reyes

Notes Receivable: Santos

Cash (P7,001.71* + P8,913.79#

Face value of note

P7,000 x 0.12 x 90/360

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

Notes Receivable Discounted

Notes Receivable Dishonored

Cash (P9,310 + P56.89)

* The Santos note matured on

Balance 1/1 (P700 P255)

Over one year

Eight months and 19 days

One month and 13 days

Assumption (a) on total receivables at year-end:

Solutions Manual to Accompany Intermediate Financial Accounting (Volume I)

April 30, 2015 Collection of note and interest: