Cash and Receivables Exercises Exercise #1
Presented below are a number of independent situations.
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. Exercise #2
Presented below is information related to James Garfield Corp., which sells merchandise with terms 2/10,
net 60. Garfield records its sales and receivables net. 1 Instructions:
Prepare all necessary entries in general journal form for Garfield Corp. Exercise #3
Braddock Inc. had the following long-term receivable account balances at December 31, 2016.
Note receivable from sale of division
Note receivable from officer $1,500,000
400,000 Transactions during 2017 and other information relating to Braddock’s long-term receivables were as
1. The $1,500,000 note receivable is dated May 1, 2016, bears interest at 9%, and represents the
balance of the consideration received from the sale of Braddock’s electronics division to New York
Company. Principal payments of $500,000 plus appropriate interest are due on May 1, 2017, 2018, and
2019. The first principal and interest payment was made on May 1, 2017. Collection of the note
installments is reasonably assured.
2. The $400,000 note receivable is dated December 31, 2016, bears interest at 8%, and is due on
December 31, 2019. The note is due from Sean May, president of Braddock Inc. and is collateralized by
10,000 shares of Braddock’s common stock. Inter- est is payable annually on December 31, and all
interest payments were paid on their due dates through December 31, 2017. The quoted market price of
Braddock’s common stock was $45 per share on December 31, 2017.
3. On April 1, 2017, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zerointerest-bearing note due on April 1, 2019. There was no established exchange price for the patent, and
the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2017, was
12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying
value of $40,000 at January 1, 2017, and the amortization for the year ended December 31, 2017, would
have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured.
4. On July 1, 2017, Braddock sold a parcel of land to Splinter Company for $200,000 under an
installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2017, and signed a 4year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note
will be $45,125 payable on July 1, 2018, through July 1, 2021. The land could have been sold at an
established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are
such that the collection of the installments on the note is reasonably assured. Instructions:
(a) Prepare the long-term receivables section of Braddock’s balance sheet at December 31, 2017.
2 (b) Prepare a schedule showing the current portion of the long-term receivables and accrued
interest receivable that would appear in Braddock’s balance sheet at December 31, 2017.
(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear
on Braddock’s income statement for the year ended December 31, 2017. Exercise #4
Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per
month with a total monthly average sales value of $250,000. Its annual bad debt rate has been
approximately 1 ½% of sales. In recent discussions with his bookkeeper, Mr. Pierce has become confused
by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance. The
following information has been presented to Pierce.
1. 2. 3. An allowance can be set up (a) on the basis of a percentage of receivables or (b) on the basis of
a valuation of all past due or otherwise questionable accounts receivable. Those considered
uncollectible can be charged to such allowance at the close of the accounting period, or specific
items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year
in which they are determined to be uncollectible.
Collection agency and legal fees, and so on, incurred in connection with the attempted recovery
of bad debts can be charged to (a) Bad Debt Expense, (b) Allowance for Doubtful Accounts, (c)
Legal Expense, or (d) Administrative Expense.
Debts previously written off in whole or in part but currently recovered can be credited to (a)
Other Revenue, (b) Bad Debt Expense, or (c) Allowance for Doubtful Accounts. Instructions:
Which of the foregoing methods would you recommend to Mr. Pierce in regard to (1) allowances and
charge-offs, (2) collection expenses, and (3) recoveries? State briefly and clearly the reasons supporting
your recommendations