IAsgns6.docx

1、IAsgns6LESSON 6 Suggested solutionsQuestion 1 (30 marks)Multiple choice (1 mark each)a. 3)Although 1 and 2 are important parts of an internal control system for cash, the segregation of the duties of cash handling from cash accounting is the most important internal control over cash.b. 3)The cash he

2、ld in the sinking fund is not available for current use. Therefore, it would be recorded as a non-current asset on the balance sheet. Note that while petty cash normally has its own G/L account, it would usually be part of cash reported on the balance sheet.c. 4)The direct write-off method of accoun

3、ting for bad debts expense violates the matching principle because the expense is recorded in the period when the account is written off, which may not be in the period the related sale was made.d. 2)Both assignment of accounts receivable and factoring of accounts receivable mean that accounts recei

4、vable are converted to cash prior to their normal collection time.e. 1)When accounts receivable are sold to a factor without recourse it means that the factor is responsible for any uncollectible accounts.f. 2)The cost of the first computer will be 4,000. Since the note payable carries the market ra

5、te of interest, no discounting is required. To get the cost of the second computer, the cash payments must be discounted at 8%. The only cash payment is the payment of 4,320 at the end of one year. The present value factor for a single sum to be paid at the end of one period, discounted at 8% is 0.9

6、259. 4,320 0.9259 = 4,000.g. 3)The fact that the maker of the note is experiencing financial difficulty does not necessarily mean that payment wont be made as scheduled. When the payee determines it is probable that the recoverable value of the note is less than its carrying value, impairment has oc

7、curred.h. 2)The bank account and the petty cash fund are two separate cash accounts and should be added together to get the total cash to be reported on the balance sheet.i. 4)The bank balance is too low compared to the cash general ledger balance because of deposits in transit. Therefore, deposits

8、in transit need to be added to the balance per bank.j. 3)The bank reconciliation is designed to reconcile both the unadjusted cash balance per the books and the unadjusted cash balance per the bank to the correct cash balance that should be reported on the balance sheet.(2 marks each)k. 3)40,000 + 2

9、0,000 4,000Or, you might notice that both reconciling items are adjustments to the bank balance. That means the general ledger balance for cash is the correct final balance.l. 2)164 + 34 = 198This means that cash is short by 2. Since there is only 34 of cash left, 166 of cash must be added to the pe

10、tty cash box.m. 2)97,850 + 10,000 13,000n. 3)1,840 + 36,750 36,200o. 3)1,000 200p. 1)X + 3,800 + 160 3,000 = 2,500X = 2,500 3,800 160 + 3,000q. 2)800,000 62,500r. 4)40,000 3,400s. 1)30,000 + (30,000 4.3553)4.3553 is the present value factor for a six-period annuity at a discount rate of 10%.t. 4)You

11、 could calculate the carrying value at December 31, year 2 (120,000) and compare it with the recoverable amount. However, since annual interest payments are expected to be made each year to maturity, and the stated interest rate is equal to the market rate of interest, it should be obvious that the

12、present value of the future payments is still equal to 120,000. If you are not sure, calculate it!Question 2 (6 marks)Requirement 1 (3 marks)Factoring without recourse means that when Desperado sells its receivables to the factor, it is the factor that assumes the risk for any accounts receivable th

13、at cannot be collected in the future. If the factor is unable to collect certain accounts receivable, it has no recourse to Desperado. Factoring with recourse means that when Desperado sells it receivables to the factor, it is Desperado who retains some (or all) of the risk of uncollectible accounts

14、. If the factor is unable to collect a particular receivable, it has the right to come back to Desperado for payment of that amount. Desperado will likely get more cash if it sells its accounts receivables on a with recourse basis. Since the risk of non-payment remains with Desperado under a with re

15、course agreement, the factor will be willing to pay more.Requirement 2 (3 marks)When receivables are sold without recourse, the transaction is normally recorded as a sale. The accounts receivable are removed from the books of Desperado and an expense equal to the difference between the price paid by

16、 the factor and the book value of the receivables is recognized.When receivables are sold with recourse, the funds received from the factor are normally recorded as a loan from the factor rather than as sales proceeds. This is because there really has not been a transfer of risk from the seller to t

17、he factor. As the customers make payments and funds are collected by the factor, the loan is reduced.Question 3 (14 marks)Requirement 1 (4 marks)Deposits in transit, November 30 3,080Plus Deposits made by Rutnip in December (11,820 90 error correction) 11,730Deposits that could have been received by

18、 bank in December 14,810Deposits actually recorded by bank in December 10,000Deposits in transit at December 31 (deposit recorded by the company but not yet recorded by the bank) 4,810Outstanding cheques, November 30 4,000Plus cheques written by Rutnip in December 6,400Cheques that could have cleare

19、d bank in December 10,400Cheques actually cleared by bank in December 8,200Outstanding cheques at December 31 (cheques written by the company but not yet recorded by the bank) 2,200Requirement 2 (5 marks)RUTNIP INC.Bank ReconciliationDecember 31, 20X5Cash balance per books, December 31, 20X5 18,770A

20、dd: Note receivable collected by bank 1,800Deduct: NSF cheque 270 December bank charge 30 December interest on bank loan 470 Error correction on deposit (320 230) 90 (860)Adjusted cash balance per books, December 31 19,710 Cash balance per bank statement, December 31, 20X5 17,100Add: Deposits in tra

21、nsit (from Requirement 1) 4,810Deduct: Outstanding cheques (from Requirement 1) (2,200)Adjusted cash balance per bank statement, December 31 19,710Requirement 3 (5 marks)Journal entries from bank reconciliation:a. Cash 1,800 Notes receivable 1,800 To record collection of note receivable made by bank

22、 on behalf of Rutnip. b. Accounts receivable, Smythe 270 Cash 270 To re-establish the account receivable from Smythe since their cheque was no good.c. Bank service charge expense 30 Cash 30 To record the monthly bank charge.d. Interest expense 470 Cash 470 To record monthly interest on bank loan.e.

23、Accounts receivable 90 Cash 90 To correct error on cash deposit originally recorded as 320, which should have been 230.Question 4 (20 marks)Requirement 1 (4 marks)Allowance for doubtful accounts 2,400 Accounts receivable 2,400There is no effect on total current assets as a result of the accounts rec

24、eivable write off entry because both accounts receivable and the related contra account are reduced by the same amount.Requirement 2 (4 marks)Accounts receivable 5,000 Allowance for doubtful accounts 5,000To re-establish the account receivable that was previously written off.Note: the collection of

25、this 5,000 is included in the 210,000 of customer payments for the year.Requirement 3 (4 marks)The balance in the accounts receivable account at December 31, 20X6, before the recording of the 20X6 bad debt expense is 194,600 as derived below:Accounts receivableBal. January 1162,000Cash collected 210

26、,000Sales on account240,000AR written off2,400Re-establish AR previously written off5,000Bal. December 31194,600The balance in the Allowance for doubtful accounts at December 31, 20X6 before the recording of the 20X6 bad debt expense is 6,000 as derived below:Allowance for doubtful accountsAR writte

27、n off2,400Bal. January 13,400Reestablish AR previously written off5,000Bal. Dec. 316,000Requirement 4 (4 marks)a. To calculate bad debt expense based on the credit sales method, the expected uncollectible rate of 2% is applied to the credit sales for the period of 240,000.2% of 240,000 = 4,800The jo

28、urnal entry would be Bad debt expense 4,800 Allowance for doubtful accounts 4,800b. To calculate bad debt expense based on the accounts receivable method, the required allowance at December 31, 20X6 (5,400) is compared to the balance in the Allowance for doubtful accounts prior to the adjustment for

29、 bad debts (6,000) and an entry is made to adjust to the required amount (5,400 6,000 = (600). The journal entry would be Allowance for doubtful accounts 600 Bad debt expense 600The reason for the negative bad debt expense is that there must have been an overestimation of the expense in prior period

30、s.Requirement 5 (4 marks) Credit sales method Accounts receivable methodCurrent assets Accounts receivable 194,600 194,600 Less: Allowance fordoubtful accounts (1) 10,800 (2) 5,400 183,800 189,200(1) 6,000 + 4,800(2) 6,000 600Question 5 (10 marks)Requirement 1 (4 marks)The present value of the 750,0

31、00 non-interest bearing note would be250,000 2.48691 = 621,7251 The present value factor of an annuity for three periods at 10% (Table 2, Appendix A Lesson 5)Therefore, the 750,000 face value note would be recorded asFace value of note 750,000Less: Discount on note receivable 128,275Present value of note receivable 621, 725The entry to record the sale of the equipment by XTL on January 1, 20X5 would beCash