Connecticut Inc. had the following long-term receivable account balances at December 31, 2006

P7-10 (Comprehensive Receivables Problem) Connecticut Inc. had the following long-term receivable account balances at December 31, 2006.

Note receivable from sale of division $1,800,000
Note receivable from officer 400,000

Transactions during 2007 and other information relating to Connecticut’s long-term receivables were as follows.

1. The $1,800,000 note receivable is dated May 1, 2006, bears interest at 9%, and represents the balance of the consideration received from the sale of Connecticut’s electronics division to New York Company. Principal payments of $600,000 plus appropriate interest are due on May 1, 2007, 2008, and 2009. The first principal and interest payment was made on May 1, 2007. Collection of the note installments is reasonably assured.
2. The $400,000 note receivable is dated December 31, 2006, bears interest at 8%, and is due on December 31, 2009. The note is due from Sean May, president of Connecticut Inc. and is collateralized by 10,000 shares of Connecticut’s common stock. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2007. The quoted market price of Connecticut’s common stock was $45 per share on December 31, 2007.
3. On April 1, 2007, Connecticut sold a patent to Pennsylvania Company in exchange for a $200,000 zero-interest-bearing note due on April 1, 2009. 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, 2007, 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, 2007, and the amortization for the year ended December 31, 2007, would have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured.
4. On July 1, 2007, Connecticut sold a parcel of land to Harrisburg Company for $200,000 under an installment sale contract. Harrisburg made a $60,000 cash down payment on July 1, 2007, and signed a 4-year 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, 2008, through July 1, 2011. The land could have been sold at an established cash price of $200,000. The cost of the land to Connecticut 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 Connecticut’s balance sheet at December 31, 2007.
(b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would appear in Connecticut’s balance sheet at December 31, 2007.
(c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on Connecticut’s income statement for the year ended December 31, 2007.

Click here for the solution: Connecticut Inc. had the following long-term receivable account balances at December 31, 2006

Hachey Company has accounts receivable of $95,100 at March 31, 2007

Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.

Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500

Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimates of bad debts are as shown below.

Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 30
Over 90 days 50

Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.


Click here for the solution: Hachey Company has accounts receivable of $95,100 at March 31, 2007

In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records

Auditing P 5-22 In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records and the recorded amounts in the accounts receivable master file. A copy of all confirmations that had exceptions was turned over to the company controller investigate the reason for the difference. He, in turn, had the bookkeeper perform the analysis. The bookkeeper analyzed each exception., determined its cause, and prepared an elaborate spreadsheet explaining exceptions were caused by timing differences in the bookkeeper's report indicated that the exceptions were caused by timing differences in the clients' and customer's records. The auditor reviewed the spreadsheet and concluded that there were no material exceptions to accounts receivable.

Two years subsequent to the audit, it was determined that the bookkeeper had stolen thousands of dollars in the past 3 years by taking cash and overstating accounts receivable. In a lawsuit by the client against the CPA, an examination of the auditors December 31, 2009, accounts receivable working papers, which were subpoenaed by the court, indicated that one of the explanations in the bookkeeper's analysis of the exceptions was fictitious. The analysis stated the exception was caused by a sales allowance granted to the customer for defective merchandise the day before the end of the year. The difference was actually caused by the bookkeeper's theft.

Required:
a. What are the legal issues involved in this situation? What should the auditor use as a defense in the event that he is sued?
b. What was the CPA's deficiency in conducting the audit of accounts receivable?


Click here for the solution: In confirming accounts receivable on December 31, 2009, the author found 15 discrepancies between the customers' records

Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger

Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger. Balances related to both the general ledger and the subsidiary ledger for Bluma are indicated in the working papers. Presented below are a series of transactions for Bluma Co. for the month of January. Credit sales terms are 2/10, n/30. The cost of all merchandise sold was 60% of the sales price.

Jan. 3 Sell merchandise on account to B. Richey $3,100, invoice no. 510, and to J. Forbes $1,800, invoice no. 511.
5 Purchase merchandise from S. Vogel $5,000 and D. Lynch $2,200, terms n/30.
7 Receive checks from S. LaDew $4,000 and B. Garcia $2,000 after discount period has lapsed.
8 Pay freight on merchandise purchased $235.
9 Send checks to S. Hoyt for $9,000 less 2% cash discount, and to D. Omara for $11,000 less 1% cash discount.
9 Issue credit of $300 to J. Forbes for merchandise returned.
10 Summary daily cash sales total $15,500.
11 Sell merchandise on account to R. Dvorak $1,600, invoice no. 512, and to S. LaDew $900, invoice no. 513.
12 Pay rent of $1,000 for January.
13 Receive payment in full from B. Richey and J. Forbes less cash discounts.
15 Withdraw $800 cash by M. Bluma for personal use.
15 Post all entries to the subsidiary ledgers.
16 Purchase merchandise from D. Omara $18,000, terms 1/10, n/30; S. Hoyt $14,200, terms 2/10, n/30; and S. Vogel $1,500, terms n/30.
17 Pay $400 cash for office supplies.
18 Return $200 of merchandise to S. Hoyt and receive credit.
20 Summary daily cash sales total $20,100.
21 Issue $15,000 note, maturing in 90 days, to R. Moses in payment of balance due.
21 Receive payment in full from S. LaDew less cash discount.
22 Sell merchandise on account to B. Richey $2,700, invoice no. 514, and to R. Dvorak $1,300, invoice no. 515.
22 Post all entries to the subsidiary ledgers.
23 Send checks to D. Omara and S. Hoyt in full payment less cash discounts.
25 Sell merchandise on account to B. Garcia $3,500, invoice no. 516, and to J. Forbes $6,100, invoice no. 517.
27 Purchase merchandise from D. Omara $14,500, terms 1/10, n/30; D. Lynch $1,200, terms n/30; and S. Vogel $5,400, terms n/30.
27 Post all entries to the subsidiary ledgers.
28 Pay $200 cash for office supplies.
31 Summary daily cash sales total $21,300.
31 Pay sales salaries $4,300 and office salaries $3,800.

Instructions
(a) Record the January transactions in a sales journal, a single-column purchases journal, a cash receipts journal as shown on page 313, a cash payments journal as shown on page 318, and a two-column general journal.
(b) Post the journals to the general ledger.
(c) Prepare a trial balance at January 31, 2010, in the trial balance columns of the worksheet. Complete the worksheet using the following additional information.
1. Office supplies at January 31 total $900.
2. Insurance coverage expires on October 31, 2010.
3. Annual depreciation on the equipment is $1,500.
4. Interest of $50 has accrued on the note payable.
TB totals $202,900; Adj. T/B totals $203,075
(d) Prepare a multiple-step income statement and an owner's equity statement for January and a classified balance sheet at the end of January.
Net income $20,755; total assets $143,505
(e) Prepare and post adjusting and closing entries.
(f) Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
PCTB $145,130


Click here for the solution: Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger

The general ledger account for Accounts Receivable shows a debit balance of $40,000

The general ledger account for Accounts Receivable shows a debit balance of $40,000. The Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $250,000. In the past, 3 percent of net sales have proved uncollectible. An aging of accounts receivable results in an estimate of $9,000 of uncollectible accounts receivable.

Calculate (1) Uncollectible Accounts Expense and (2) the ending balance of the Allowance for Uncollectible Accounts using (a) the percentage of net sales method and (b) the accounts receivable aging method.

Create an Excel spreadsheet to submit your assignment.

Click here for the solution: The general ledger account for Accounts Receivable shows a debit balance of $40,000