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Chapter 7: Question: E7-8 (page 366)

(Recording Bad Debts) At the end of 2017, Aramis Company has accounts receivable of \(800,000 and an allowance for doubtful accounts of \)40,000. On January 16, 2018, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.

Instructions

(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.

(b) What is the net realizable value of Aramis Company鈥檚 accounts receivable before the write-off of the Ramirez receivable?

(c) What is the net realizable value of Aramis Company鈥檚 accounts receivable after the write-off of the Ramirez receivable?

Short Answer

Expert verified

Net realizable value after write-off is equal to$760,000.

Step by step solution

01

Definition of Net Realizable Value

Net Realizable value refers to a business entity鈥檚 value from selling an asset after adjusting all selling expenses.

02

Journal entry to write off

Date

Accounts and Explanation

Debit $

Credit $

Allowance for doubtful accounts

$6,000

Accounts receivables

$6,000

03

Net realizable value before write off

Particular

Amount $

Accounts receivables

$800,000

Less: Allowance for doubtful accounts

(40,000)

Net realizable value

$740,000

04

Net realizable value after write off

Particular

Amount $

Accounts receivables$8,000-$6,000

$794,000

Less: Allowance for doubtful accounts$40,000-$6,000

(34,000)

Net realizable value

$760,000

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Most popular questions from this chapter

Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require 鈥渞ecourse鈥� on the sold receivables. Explain to the controller of Moon Hardware what 鈥渞ecourse鈥� is and how the recourse will be reflected in Moon鈥檚 financial statements after the sale of the receivables.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment鈥檚 list price. Each note鈥檚 stated interest rate is below the customer鈥檚 market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

How should Corrs account for the sale, without recourse, of a February 1, 2017, note receivable sold on May 1, 2017? Why is it appropriate to account for it in this way?

Recent financial statements of General Mills, Inc. report net sales of \(12,442,000,000. Accounts receivable are \)912,000,000 at the beginning of the year and $953,000,000 at the end of the year. Compute General Mills鈥� accounts receivable turnover. Compute General Mills鈥� average collection period for accounts receivable in days.

Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.

Instructions

(a) What are the deficiencies of the direct write-off method?

(b) Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?

(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?

Presented below are a number of independent situations.

Instructions

For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.

1. Checking account balance \(925,000; certificate of deposit \)1,400,000; cash advance to subsidiary of \(980,000; utility deposit paid to gas company \)180.

2. Checking account balance \(600,000; an overdraft in special checking account at same bank as normal checking account of \)17,000; cash held in a bond sinking fund \(200,000; petty cash fund \)300; coins and currency on hand \(1,350.

3. Checking account balance \)590,000; postdated check from customer \(11,000; cash restricted due to maintaining compensating balance requirement of \)100,000; certified check from customer \(9,800; postage stamps on hand \)620.

4. Checking account balance at bank \(37,000; money market balance at mutual fund (has checking privileges) \)48,000; NSF check received from customer \(800.

5. Checking account balance \)700,000; cash restricted for future plant expansion \(500,000; short-term Treasury bills \)180,000; cash advance received from customer \(900 (not included in checking account balance); cash advance of \)7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.
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