B EXERCISES
5 E6-10B (Unknown Periods and Unknown Interest Rate) Consider the following independent situations.
(a) Jafri wishes to accumulate $2 million. His money market fund has a balance of $184,592 and has a guaranteed interest rate of 10%. How many years must Jafri leave that balance in the fund in order to get his desired $2,000,000?
(b) Assume that Jones desires to accumulate $2 million in 15 years using her money market fund of
$365,392. At what interest rate must Jones’s investment compound annually?
5 6 E6-12B (Analysis of Alternatives) Bandit Inc., manufactures ice tea and would like to increase its mar- ket share in the North. In order to do so, Bandit has decided to locate a new factory in the Cedar Rapid
7 area. Bandit will either buy or lease a site depending upon which is more advantageous. The site loca-
tion committee has narrowed down the available sites to the following three buildings.
Building A: Purchase for a cash price of $1,500,000, useful life 25 years.Building B: Lease for 25 years with annual lease payments of $125,000 being made at the beginning of the year.Building C: Purchase for $1,750,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $21,000. Rental payments will be received at the end of each year. Bandit Inc. has no aversion to being a landlord.Instructions
In which building would you recommend that Bandit Inc. locate, assuming a 8% cost of funds?
(Unless instructed otherwise, round answers to the nearest dollar. Interest rates are per annum unless otherwise indicated.)
P6-4B (Evaluating Payment Alternatives) BB John has just learned he has won a $2,500,000 prize in the state lottery. He has two options for receiving the payments: (1) If BB takes all the money today, the state and federal governments will deduct taxes at a combined rate of 40% immediately. (2) Alternatively, the lottery offers BB a payout of 20 equal payments of $200,000 with the first payment occurring when BB turns in the winning ticket. BB will be taxed on each of these payments at a rate of 30%.Instructions
Assuming BB can earn an 6% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose?5 7 P6-5B (Analysis of Alternatives) Grandma Jonesy died, leaving to her Grandson Bart, an insurance pol- icy contract that provides that the beneficiary (Bart) can choose any one of the following four options.
(a) $200,000 immediate cash.
(b) $12,000 every 3 months payable at the end of each quarter for 5 years.
(c) $50,000 immediate cash and $5,000 every 3 months for 10 years, payable at the beginning of each
3-month period.
(d) $12,000 every 3 months for 4 years and $3,750 each quarter for the following 10 quarters, all pay-
ments payable at the end of each quarter.Instructions
If money is worth 2% per quarter, compounded quarterly, which option would you recommend that Brent exercise?
B EXERCISES
1 E7-1B (Determining Cash Balance) The controller for Clair Co. is attempting to determine the amount of cash to be reported on its December 31, 2014, balance sheet. The following information is provided.
1. Commercial savings account of $1,200,000 and a commercial checking account balance of
$1,800,000 are held at First National Bank of Yojimbo.
2. A money market fund account of $10,000,000, held at Nguyen Co. (a mutual fund organization)
permits Clair Co. to write checks on this balance.
3. Travel advances of $360,000 for executive travel for the first quarter of next year (employee to re-
imburse through salary reduction).
4. A separate cash fund in the amount of $3,000,000 is restricted for the retirement of long-term debt.
5. Petty cash fund of $2,000.
6. An I.O.U. from Nyamaan, a company customer, in the amount of $380,000.
7. A bank overdraft of $220,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.
8. The company has two certificates of deposit, each totaling $1,000,000. These CDs have a maturity
of 120 days.
9. Clair has received a check that is dated January 12, 2015, in the amount of $250,000.
10. Clair has agreed to maintain a cash balance of $1,000,000 at all times at First National Bank of
Yojimbo to ensure future credit availability.
11. Clair has purchased $4,200,000 of commercial paper of Sergio Leone Co. which is due in 60 days.
12. Currency and coin on hand amounted to $15,400.Instructions
(a) Compute the amount of cash to be reported on Clair Co.’s balance sheet at December 31, 2014.
(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2014,
balance sheet.5 E7-9B (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of
Santillan Inc. shows the following balances.
Debits CreditsAccounts Receivable
$180,000
Allowance for Doubtful Accounts 3,500
Sales (all on credit) $1,000,000
Give the entry for estimated bad debts assuming that the allowances is to provide for doubtful accounts on the basis of (a) 5% of gross accounts receivable and (b) 1% of net sales.
4 5 E7-12B ( Journalizing Various Receivable Transactions) Presented below is information related to
8 Junket Corp.
August 1 Junket Corp. sold to Sharper Co. merchandise having a sales price of $21,000 with terms
1/10, net/60. Junket records its sales and receivables net.
5 Accounts receivable of $57,000 (gross) are factored with Easy Credit Corp. with recourse
at a financing charge of 5%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.)
9 Specific accounts receivable of $30,000 (gross) are pledged to Second Credit Corp. as security for a loan of $20,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.)
Sep. 29 Sharper Co. notifies Junket that it is bankrupt and will pay only 20% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable when the discount period passed.)Instructions
Prepare all necessary entries in general journal form for Junket Corp.10 *E7-25B (Bank Reconciliation and Adjusting Entries) Elfen Company has just received the October 31,
2014, bank statement, which is summarized below.Tri National Bank Disbursements Receipts Balance
Balance, October 1 $21,361
Deposits during October $47,200 68,561
Note collected for depositor, including $40 interest 2,040 70,601
Checks cleared during October $54,501 16,100
Bank service charges 10 16,090
Balance, October 31 16,090
The general ledger Cash account contained the following entries for the month of October.CashBalance, October 1 17,801 Disbursements in October 45,271
Receipts during October 45,000
Deposits in transit at October 31 are $4,800, and checks outstanding at October 31 total $1,550. Cash on hand at October 31 is $250. The bookkeeper improperly entered one check in the books at
$210.00 which was written for $180.00 for supplies (expense); it cleared the bank during the month of
October.Instructions
(a) Prepare a bank reconciliation dated October 31, 2014, proceeding to a correct balance.
(b) Prepare any entries necessary to make the books correct and complete.
(c) What amount of cash should be reported in the October 31 balance sheet?
5 P7-4B (Bad-Debt Reporting) From inception of operations to December 31, 2014, Peecan Corporation provided for uncollectible accounts receivable under the allowance method: provisions were made monthly at 1% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allow- ance account were made. Peecan’s usual credit terms are net 30 days.
The balance in Allowance for Doubtful Accounts was $86,000 at January 1, 2014. During 2014, credit sales totaled $6,200,000, interim provisions for doubtful accounts were made at 1% of credit sales, $47,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $3,000. Peecan installed a computer system in November 2014, and an aging of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the aging is as follows.Classification by
Month of Sale Balance in
Each Category Estimated % Uncollectible
November–December 2014 $760,000 1%
July–October 201,000 8%
January–June 89,000 30%
Prior to 1/1/2014 80,000 90%
$1,130,000
Based on the review of collectibility of the account balances in the “prior to 1/1/2014” aging category, ad- ditional receivables totaling $30,000 were written off as of December 31, 2014. The 90% uncollectible esti- mate applies to the remaining $50,000 in the category. Effective with the year ended December 31, 2014, Peecan adopted a different method for estimating the allowance for doubtful accounts at the amount indi- cated by the year-end aging analysis of accounts receivable.
(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended
December 31, 2014. Show supporting computations in good form. (Hint: In computing the
12/31/2014 allowance, subtract the $30,000 write-off).
(b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts
balance as of December 31, 2014.
(AICPA adapted)
10 *P7-13B (Bank Reconciliation and Adjusting Entries) The cash account of Green Co. showed a ledger bal- ance of $8,650,90 on November 30, 2014. The bank statement as of that date showed a balance of $10,667.00. Upon comparing the statement with the cash records, the following facts were determined.
1. There were bank service charges for November of $30.
2. A bank memo stated that Solo’s note for $1,500 and interest of $61 had been collected on November
3, and the bank had made a charge of $8 on the collection. (No entry had been made on Green’s books
when Solo’s note was sent to the bank for collection.)
3. Receipts for November 30 for $1,170 were not deposited until December 4.
4. Checks outstanding on November 30 totaled $2,361.20.
5. The bank had charged Green Co.’s account for a customer ’s uncollectible check amounting to $318.00
on November 29.
6. A customer ’s check for $210 had been entered as $240 in the cash receipts journal by Green on Novem-
ber 21.
7. Check no. 8560 in the amount of $580 had been entered in the cash journal as $850, and check no. 8572
in the amount of $688.00 had been entered as $68.80. Both checks had been issued to pay for pur-
chases of inventory on account.Instructions
(a) Prepare a bank reconciliation dated November 30, 2014, proceeding to a correct cash balance.
(b) Prepare any entries necessary to make the books correct and complete.
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