100. A summary of Klugman Company's December 31, 2006, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:

Age Group	Amount	%
0 - 60 days	$60,000	.5
61 - 90 days	22,000	1.0
91 - 120 days	3,000	10.0
over 120 days	1,000	50.0

The allowance for uncollectible accounts had a balance of $1,400 on January 1, 2006. During the year, bad debts of $750 were written off.

Required:

Prepare all journal entries for 2006 with respect to uncollectible accounts and the allowance for uncollectible accounts.

Answer:

		Estimated
Age	Amount	Loss Rate	Allowance
0 - 60 days	$60,000	.005	$ 300
61 - 90 days	22,000	.010	220
91 - 120 days	3,000	.100	300
Over 120 days	1,000	.500	500
			$1,320

Allowance for uncollectible accounts	750
Accounts receivable		750
Bad debt expense	670
Allowance for uncollectible accounts		670	[$1,320 - ($1,400 - 750)]

Learning Objective: 5 Level of Learning: 3

101. A summary of London Fashion's December 31, 2006, accounts receivable aging schedule is presented below along with the estimated percent uncollectible for each age group:

Age Group	Amount	%
0 - 60 days	$40,000	.5
61 - 90 days	15,000	1.5
91 - 120 days	2,000	15.0
over 120 days	800	80.0

The allowance for uncollectible accounts had a balance of $1,600 at January 1, 2006. During the year bad debts of $1,150 were written off.

Required:

Prepare all 2006 journal entries with respect to uncollectible accounts and the allowance for uncollectible accounts.

Answer:

		Estimated
Age	Amount	Loss Rate	Allowance
0 - 60 days	$40,000	.005	$ 200
61 - 90 days	15,000	.015	225
91 - 120 days	2,000	.150	300
Over 120 days	800	.800	640
			$1,365

Allowance for uncollectible accounts	1,150
Accounts receivable		1,150
Bad debt expense	915
Allowance for uncollectible accounts		915	[$1,365 - ($1,600 - 1,150)]

Learning Objective: 5 Level of Learning: 3

102. On December 31, 2005, Central Freight reported an allowance for uncollectible accounts of $15,300. During 2006, Central wrote off $17,000 in accounts receivable deemed uncollectible. Included in the write-off was Central Freight's account in the amount of $750. Central Freight subsequently paid this balance. At December 31, 2006, an analysis of the accounts receivable aging schedule indicated the need for an allowance for uncollectible accounts of $14,900.

Required:

Prepare all implied journal entries relative to bad debt expense and the allowance for uncollectible accounts.

Answer:

Allowance for uncollectible accounts	17,000
Accounts receivable		17,000
Accounts receivable	750
Allowance for uncollectible accounts		750
Bad debt expense	15,850
Allowance for uncollectible accounts		15,850	[$14,900 - ($15,300 - 17,000 + 750)]

Learning Objective: 5 Level of Learning: 3

103. Tokyo Imports sold merchandise to Tall-Mart, receiving a 6-month, noninterest-bearing note for $100,000. The implied discount rate on the note is 10% per annum. Tokyo uses a periodic inventory system.

Required:

(1) Prepare the journal entry to record the sale. (2) Compute the effective rate of interest.

Answer:

(1)	Note receivable	100,000
	Discount on note receivable		5,000
	Sales revenue		95,000

(2) Effective interest rate= ($5,000/$95,000) x 2 = 10.53%

Learning Objective: 7 Level of Learning: 3

104. Montana Minerals sold coal to Beta Electric, receiving a 6-month, noninterest-bearing note for $200,000. The implied discount rate on the note is 8% per annum. Montana uses a periodic inventory system.

Required:

(1) Prepare the journal entry to record the sale. (2) Compute the effective rate of interest.

Answer:

(1)	Note receivable	200,000
	Discount on note receivable		8,000
	Sales revenue		192,000

(2) Effective interest = $8,000/$196,000 x 2 = 8.16%

Learning Objective: 7 Level of Learning: 3

105. On December 1, 2006, General Mole borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivable as collateral. Additionally, General Mole was charged a finance fee equal to 1% of the accounts receivable assigned. In late December, $300,000 of the assigned receivables were collected and remitted to the lender.

Required:

Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.

Answer:

Cash	395,000
Finance charge expense	5,000
Liability - financing arrangement		400,000
Cash	300,000
Accounts receivable		300,000
Interest expense	4,000		($400,000 x .12 x 1/12)
Liability - financing arrangement	300,000
Cash
		304,000

Learning Objective: 8 Level of Learning: 3

106. On December 1, 2006, Watergate Hotels borrowed $400,000 at 12% interest and pledged $500,000 in accounts receivables as collateral. Additionally, Watergate was charged a finance fee equal to 1% of the accounts receivable assigned. In late December, $300,000 of the assigned receivables were collected and remitted to the lender.

Required:

Prepare journal entries to record the borrowing, the assignment of receivables, the collection on the receivables, and the recognition of interest expense.

Answer:

Cash	375,000
Finance charge expense	5,000
Liability - financing arrangement		400,000
Cash	300,000
Accounts receivable		300,000
Interest expense	4,000		($400,000 x .12 x 1/12)
Liability - financing arrangement	300,000
Cash		304,000

Learning Objective: 8 Level of Learning: 3

107. On February 1, 2006, Stealth Trucks sold a diesel rig to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity and the 10% interest rate reflected the market rate of interest at the time of sale. On August 1, 2006, Kansas Transports discounted the note without recourse at the First South Bank at 12% interest.

Required:

Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note.

Answer:

Accrue interest to discount date:
Interest receivable	10,000
Interest revenue		10,000		($200,000 x 10% x 6/12)
Face amount of note	$200,000
Interest to maturity	20,000	$220,000
Discount		(13,200	)	($220,000 x 12% x 6/12)
Cash proceeds		$206,800
Discounting of note:
Cash	206,800
Loss on sale of note receivable	3,200
Note receivable		200,000
Interest receivable		10,000		Accrued as of
				discount date-see
				JE above

Learning Objective: 8 Level of Learning: 3

108. On June 30, 2006, Obama Fixtures was considering alternatives to bolster its cash position. Option One called for transferring $400,000 in accounts receivable to Dogwood's Finance Company without recourse for a 5% fee. Option Two calls for Obama to transfer the $400,000 in receivables to Dogwood's with recourse. Dogwood's charges a 4% fee for receivables factored with recourse. Option Two does not meet the conditions to be considered a sale, but Obama estimates a $3,000 recourse liability. Under either option, Dogwood's will remit 90% of the factored receivables to Obama and retains 10%. When Dogwood's collects the receivables, it remits the amount, less the fee.

Required:

1. Prepare any necessary journal entry or entries if receivables are factored under Option One.

2. Prepare any necessary journal entry or entries if receivables are factored under Option Two.

Answer:

(1)	Cash (90% x $400,000)	360,000
	Loss on sale of receivables (5% x $400,000)	20,000
	Receivable from factor (10% x $400,000, - $20,000 fee)	20,000
	Accounts receivable		400,000
(2)	Cash (90% x $400,000)	360,000
	Loss on sale of receivables (4% x $400,000, + 3,000)	19,000
	Receivable from factor (10% x $400,000, - $16,000 fee)	24,000
	Recourse liability		3,000
	Accounts receivable		400,000

Learning Objective: 8 Level of Learning: 3

Use the following to answer questions 109-114:

The following footnote disclosure is taken from the 2005 annual report to shareholders of Winchester International Corporation.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

The allowance for loan loss is maintained at a level to absorb probable losses inherent in the loan portfolio. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and reduced by charge-offs on loans.

The following is a summary of the changes in the allowances for loan losses for three years follows:

	At December 31,
(In thousands)	2005		2004		2003
Balance at beginning of year	$ 91,809		73,658		66,201
Allowances from purchase transactions	1,851		10,980		3,647
Provisions charged to operations	14,400		11,800		9,000
Subtotal	108,060		96,438		78,848
Charge-offs	(11,575	)	(6,816	)	(7,406	)
Recoveries	1,822		2,187		2,216
Net charge-offs	(9,753	)	(4,629	)	(5,190	)
Balance at end of year	$ 98,307		91,809		73,658

Winchester also reported (in thousands) in its comparative balance sheet that it held Loans receivable, net, of $6,869,911 and $6,819,209 at December 31 ,2005 and December 31, 2004, respectively.

Required:

109. What kind of account is the Allowance for Loan Losses in Winchester's financial statements?

Answer: The Allowance for Loan Losses is a contra-asset account in Winchester's balance sheet, one that offsets Loans Receivable.

Learning Objective: 5 Level of Learning: 2

110. Using a T-account for the Allowance for Loan Losses, identify the changes in the account during 2005.

Answer:

Allowance for Loan Losses
	Beg. Bal. 91,809
Charge-offs 11,575	Allowances from acquisitions 1,851
	Provisions charged to operations 14,400
	Recoveries 1,822
	End. Bal. 98,307

Learning Objective: 5 Level of Learning: 2

111. For each posted entry in the Allowance account during 2005, indicate the remaining entry(ies) in other accounts.

Answer:

Receivables from acquisitions 1,851 (debit)

Loan losses 14,400 (debit)

Loans receivable 1,822 (debit)

Loans receivable 11,575 (credit)

Learning Objective: 6 Level of Learning: 3

112. If Winchester is using the balance sheet approach to determining loan losses and the Allowance account balance, what percentage did it use in 2005?

Answer:

Loans Receivable (net) = Loans Receivable (gross) – Allowance for Loan Losses

Therefore, Loans Receivable (gross) = $6,869,911 + $98,307 = $6,968,218

Percentage used = $98,307/$6,968,218 = 1.41%

Learning Objective: 6 Level of Learning: 3

113. How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?

Answer: The Allowance method requires that firms estimate the loan losses charged to operations and the balance sheet valuation of the contra-asset account. In good times, firms might be extra conservative in estimating these amounts (i.e., charge more to the losses and allowances) because they can afford to do so. In later years, when they may need to increase earnings, they can "borrow" from the allowance, which was previously overestimated, thereby charging a smaller loss to operations of that period. This is a type of cookie jar reserve in earnings management parlance.

Learning Objective: 5 Level of Learning: 2