chapter 8 - mycga web services · web viewintermediate accounting, volume 1, 5 th edition © 2011...

Chapter 7: Financial Instruments: Cash, Receivables and Payables

Suggested TimeCase 7-1 Steve’s Groceries Inc.

7-2 Removed7-3 Mitrium Corp.

Assignment 7-1 Financial instruments classification ............... 157-2 Net accounts receivable................................... 157-3 Net accounts receivable................................... 157-4 Net accounts receivable; entries....................... 207-5 Alternatives for estimation—allowances......... 307-6 Alternatives for estimation—allowances......... 307-7 Estimating bad debt expense (*W).................. 307-8 Alternatives for estimation—allowance for

doubtful accounts..................................... 307-9 removed7-10 Allowance for doubtful accounts..................... 307-11 Transfer of accounts receivable....................... 207-12 Transfer of accounts receivable....................... 207-13 Transfer of accounts receivable ...................... 307-14 Accounts receivable issues.............................. 157-15 Note receivable................................................ 257-16 Note receivable(*W)........................................ 257-17 Note receivable................................................ 157-18 Non-interest-bearing and low-interest notes.... 207-19 Notes payable................................................... 207-20 Notes payable................................................... 357-21 Impairment: change in present value .............. 20

continued. . .

© 2011 McGraw-Hill Ryerson Ltd. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition 7-1

Assignment 7-22 Compensated absences..................................... 157-23 Entries to record sales taxes, payroll and

related entries........................................... 307-24 Balances for sales taxes, payroll taxes............. 157-25 Recording and reporting transactions (*W)..... 357-26 Foreign exchange............................................. 157-27 Comprehensive................................................ 357-28 Comprehensive................................................ 407-29 Bank reconciliation (Appendix)....................... 207-30 Bank reconciliation (Appendix)....................... 30 7-31 Bank reconciliation (Appendix)....................... 257-32 Bank reconciliation (Appendix) (*W)............. 25

*W The solution to this assignment is on the text Web site and in the Study Guide. The solution is marked WEB.

From the OLC, with respect to the appendix to chapter 7“Interest – Concepts of Future and Present Value”Note: The appendix, assignment material and compound interest tables are available on the OLC.

App 7-1 Time value of money (appendix)..................... 20App 7-2 Time value of money (appendix)..................... 20App 7-3 Time value of money (appendix)..................... 20App 7-4 Time value of money (appendix)..................... 50App 7-5 Time value of money (appendix)..................... 20App 7-6 Time value of money (appendix)..................... 40

©2011 McGraw-Hill Ryerson Ltd. All rights reserved7-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition

Questions

1. Cash is classified as a FVTPL asset, with any gains and losses included in earnings. Cash equivalents, accounts receivable and accounts payable usually meet the criteria to be classified as amortized cost financial instruments. They may be classified as FVTPL if management wishes to avoid an accounting mismatch or if they are loans and receivables that are to be sold in the short term.

All elements are initially recorded at fair value, which is the transaction value and establishes the cost of the investment. A FVTPL investment is remeasured to fair value at each reporting date, with gains and losses in earnings. An amortized cost investment is not remeasured, but approriate amounts are amortized and allowances are established, as needed.

2. The sale is recorded at the Canadian dollar equivalent on the date of sale, $176,000 ($160,000 x $1.10). The cash at year end is recorded at the current rate, $184,000 ($160,000 x $1.15). (The $8,000 difference is an exchange gain, included in earnings.)

3. Internal control over cash is important because cash is easy to conceal and transport, carries no mark of ownership, and is universally valued. It can be stolen in a variety of ways. One basic element of control is division of duties, so that one person cannot steal cash and cover the theft through manipulation of accounting records.

4. The basic purposes of a bank reconciliation are:a) Control—reconciles bank balance with book balance; provides evidence of

accuracy for all transaction recording.b) Reporting—establishes correct ending cash balance.c) Entries—provides data needed to update the cash account.Someone other than the person in charge of preparing, receiving and recording cheques and deposits should do the bank reconciliation. (Division of duties for internal control.)

5. The entry to adjust the allowance is:Sales returns....................................................................... 15,000

Allowance for sales returns ($25,000 - $10,000)........ 15,000

6. Collection may not equal the $4,000,000 gross amount of accounts receivable if:a) There are cash discounts offered to customers for paying within a certain period

and the accounts receivable have been recorded gross.b) There are sales returns and allowances yet to be granted on the accounts

receivable.c) Some customers will not pay, creating bad debts.


7. The entry to write off an account considered uncollectible is:Allowance for doubtful accounts....................................... XXXX

Accounts receivable (name)........................................ XXXX

The entries for collection of an account previously written off:Accounts receivable (name).............................................. XXXX

Allowance for doubtful accounts................................. XXXXCash................................................................................... XXXX

Accounts receivable (name)........................................ XXXX

Alternatively, one entry could be made, debiting cash and crediting the allowance.

8. The direct write-off method for bad debts may be used if a business is new and has no basis for estimating uncollectibles or if uncollectibles are immaterial. Note that if there is no basis to estimate material uncollectibles, revenue recognition must be delayed.

9. (a) Based on (b) Based onA/R sales

Base amount............................... $15,000 $80,000Bad debt expense........................ 500* 320**Allowance for doubtful accounts $ 1,200 $ 1,020*($15,000 x 8% = $1,200) – $700 = $500. **$80,000 x .4% = $320

10. The following strategies can be used to improve cash flow associated with accounts receivable:a) Accept credit cards or debit cards instead of granting credit.b) Encourage customers to pay faster by offering early payment discounts.c) Borrow, using accounts receivable as collateral.d) Sell/transfer accounts receivable.

11. A sale ‘with recourse’ means that if the customer who owes the account receivable does not pay the finance company who bought the receivable, the company (transferor) will have to repay the finance company. A ‘without recourse’ sale means that the finance company accepts credit risk, and will suffer a loss if the final customer does not pay. The ‘without recourse’ option is more expensive because of this transferred risk, for which the lender requires compensation.

Recording alternatives:Sale (derecognition):

Accounts receivable are removed (credited) from the statement of financial position, cash is increased, and interest expense is recorded.

Borrowing: When recorded as a borrowing, cash is increased, and a liability to the lender is recorded. Interest is recorded as appropriate over time. Customer payment

reduces both the receivable and the loan.


12. A transfer of receivables is recorded as a sale (derecognition) if:a. The rights to the cash flows from the assets have expired. b. The transferor has no continuing involvement in the assets transferred. c. The finance company has the practical ability to re-transfer the receivables for

its own benefit. Otherwise, the transfer is recorded as a borrowing.Under ASPE, surrender of control is required to record the transfer as a sale. Otherwise, the transfer is recorded as a borrowing.Ratios that are particularly affected are debt/equity, current ratio, return on assets, and the length of the cash-to-cash cycle.

13. a) If the arrangement is recorded as a borrowing:Cash................................................................................ 8,500Discount on note payable............................................... 800

Note payable........................................................... 9,300Since the $700 doubtful account is already in the allowance, no bad debt adjustment is needed. It would be premature to write off the accounts at this stage.

b) If the arrangement is recorded as a sale:Cash................................................................................ 8,500Allowance for doubtful accounts.................................... 700Financing expense ($10,000 - $8,500) - $700................ 800

Accounts receivable................................................ 10,000

The arrangement would be recorded as a sale if the rights to the cash flow had expired, the transferor had no continuing involvement in the accounts receivable, or if the transferee has the right to re-transfer the receivables. Terms such as recourse and/or repurchase agreements make it less likely that a sale has taken place. If there is no sale, a borrowing will be recorded.

14. A note receivable may be preferred to an account receivable when the company has set up extended payment terms, wishes to establish security, wants a formal agreement regarding interest, or wants to improve the negotiability of the receivable.

15. A two-year receivable is valued as follows:

a) no-interest – at present value of principal, using current market interest rate as the discount factor.

b) low-interest – at present value of principal plus (low) interest payments; use current market interest rate as the discount factor.

If the note has a term of two months, interest would be immaterial so the note would be valued at face value.

16. Present value: $20,000 x (P/F, 10%, 1) = $18,182Principal: $18,182 (same as the present value)


Interest: $20,000 – $18,182 = $1,818, or $18,182 x .10 = $1,818

17. Interest-Bearing Note Noninterest-Bearing Note a) Face amount of the note $6,000 $6,600b) Principal amount 6,000 6,000**c) Maturity amount 6,000* 6,600d) Interest paid $6,000 (.10) 600 $6,600–$6,000 600

* Principal only; $6,000 plus $600 interest would be paid.** $6,600 x (P/F, 10%, 1)

18. A compensated absence is time away from work (represented typically by vacation) given to employees without reducing their salaries or wages. The related expense should be recognized when earned and not when the time is taken off, if the two are different.

19. The loan must be classified as short-term, due to its legal description as a short-term loan, due on demand. Classification is not governed by intention. The loan can be reclassified as long-term if there is a contractual agreement in place to replace the short-term loan with a long-term loan as of the year-end date.

20. Exchange gain, receivable ($1.08–$1.13) x $100,000................................. $5,000Exchange loss, payable ($1.12–$1.13) x $75,000........................................ 750

Total gain................................................................................................ $4,250

The receivable and payable may not be netted (offset) on the statement of financial position because the company does not have the legal right to net receivables/payables from different parties.


Cases

Case 7-1Steve’s Groceries Inc.

Overview

Steve Marcus, the sole shareholder of SGI, has established a corporate culture which emphasizes his ethical beliefs: integrity and commitment to the communities in which his business operates. There have been changes at SGI this year which include the hiring of Marci Lucas as manager of accounting and the design of a bonus plan to take effect in fiscal 20X10 (next year). Earnings is thus a critical metric; amounts could be expensed (or deferred) in 20x9 to artifically increase 20x10 earnings. Steve has to have audited statements as one of the terms for a government cost-reimbursement program. Steve is likely to be applying ASPE given the size of his company.

Issues1. Accounting for bad debts2. Accrual of loss on purchase commitments3. Capitalization of expenses4. Accrual of government salary support5. Impact of adjustments on following year earnings and bonus

Analysis and conclusions

1. Accounting for bad debts

Steve expressed some concern over the method with which SGI accounts for bad debts. Steve is correct in saying that the allowance method is required under GAAP. However, if bad debts are immaterial to the financial statements, it is acceptable to use the direct write-off method which means bad debts are not estimated and matched to sales but rather written off when the account is known to be uncollectible. Since SGI is a grocery store chain, sales are likely primarily cash sales. Therefore, bad debts are not an issue and the direct write off-method is acceptable.

2. Accrual of loss on purchase commitments

Losses must be accrued on purchase comitments if market prices are lower than he commitment price. However, in the loss accrual entry, the price used is 25 cents below the current market price of lobster. By booking a loss/estimated liability with the potential to be overstated, there is potential to take some of the loss back into earnings in the next fiscal year, when bonus takes effect.

There does not seem to be any support for the anticipated additional decline in market prices beyond the fact that the economy is currently weak. Reference to what is an historic low market price may not be justified. Additional research should be done to determine what experts predict for the market price of lobster over the next 12 months


In order to record a loss on a purchase commitment the loss must be likely and measurable. Also, the contract must not be subject to renegotiation. It is not known whether the contract is negotiable or not but this should be looked into before booking a loss. A careful reading of the contract will be required by Steve and us, as auditors.

3. Capitalization of expenses

AJE#2 expenses items that likely should have been capitalized.

The re-shingling of $12,000 represents a betterment to the building since the shingles will extend the useful life of the building beyond regular shingles. The additional insulation added to the building also represents betterment since heating costs will presumably be lower in future periods due to this expenditure.

Further explanation from Marci will be required to support why she does not believe that future economic benefit exists as a result of these expenditures. It may be that Marci is attempting to reduce future depreciation expense by expensing in full this fiscal period. This treatment would positively impact her future bonuses.

Also of concern is that Marci is booking a portion of the expense to salary and wage expenses. Unless SGI employees performed this work, salary accounts should not be debited. It must be determined whether employees or external contractors did this work. This is particularly important as inappropriate recording of salary and wage expense is a violation of the agreement between SGI and DCS. DCS could view this as a deliberate attempt to manipulate which would mean loss of funding and a tarnished reputation for SGI.

The exsiting roof likely should be written off and the new shingles, and the insulation, should be capitaltized. Depreciation of capitalized amount would be required.

4. Accrual of government salary support

Government salary support should be booked in fiscal 20x9 as opposed to being delayed until 20x10. Since the jobs were provided in 20x9, SGI earned the reimbursement in 20x9 and should record it accordingly. It Marci might be delaying this adjustment until 20x10 so that 20x10 earnings (and therefore bonuses) is increased. Information needed for the claim includes 20x9 total salaries and wages, and salaries and wages for employees with physical or mental disabilities.

5. Impact on earnings and bonus

There are issues with the adjusting journal entries provided by Marci. The entries are generally in violation of GAAP and bring her competence and/or integrity into question. Since she is a professional accountant, one can assume that she has a basic level of


accounting knowledge. From this perspective, it seems that she booking journal entries to manipulate the financial statements in such a way that 2010 earnings (and therefore bonuses) will be maximized. Given Steve’s general integrity, one then wonders whether Marci has adapted to ths corporate culture.

Conclusion

Marci appears to be acting unethically in an attempt to increase her bonus in 2010. Her actions are also putting SGI’s funding from DCS and overall reputation for acting with integrity in jeopardy. This must be addressed as soon as possible.


Case 7-2 New Design Limited (Removed)Assignment question adapted from this question

Case 7-3Mitrium Corp.

Overview

Mitrium is a private company, owned by twelve shareholders, of whom four are actively involved in the business. The company has been challenged by the trend to private labels in the grocery business, and profits are likely down. The major users of the financial statements are the investors, who could be expected to rely on the financial statements to see how the investment is performing. The financial statements are used to calculate bonuses for the four active shareholders. Lenders are the other major user group, and there is a requirement to have audited financial statements, presumably in accordance with GAAP. There are current ratio and debt-to-equity ratios that must be met in debt covenants, and the current ratio is especially problematic. The company could use ASPE, since they are a private company, but no information is given as to whether they wish to comply with this or IFRS.

Issues

1. Accounting for transfer of accounts receivable2. Allowance for sales discounts3. Allowance for doubtful accounts4. Receivable from related party5. Presentation of cash6. Other reporting issues7. Ratio compliance

Analysis

1. Accounting for transfer of accounts receivable

The transfer of accounts receivable has been accounted for as a sale in the draft financial statement. Since Mitrium has continuing invovement with the accounts receivable (they have retained the right to pledge the accounts receivable and the right to repurchase), the transaction must be accounted for as a loan. (Note: this conclusion would also be true if ASPE were applied; the transfer would be classified as a borrowing.)

Accordingly, the derecognition of accounts receivable has been reversed and a loan recorded in the revised financial statements shown in Exhibit 2 (Entry #2, Exhibit 4). In doing so, the allowance for doubtful accounts has been reinstated by $4, and a prepaid was set up for the unexpired financial fee ($1.9 x 35/45, rounded). Because the financing fee is not yet an expense, both retained earnings (the after-tax amount), and deferred tax(the tax portion) are increased.


2. Allowance for sales discounts

The program for sales discounts is new this year. There are accounts receivable outstanding at year-end that are eligible for the discount, and this must be accrued with an allowance to properly state net sales, earnings and accounts receivable. The historic rate of those using the discount has been estimated using the data from the four days in December where the discount has expired. A simple average of the utilization rate is 53%. This should be reviewed with more data to ensure that it is reasonable. Then, the likely use of the sales discount is calculated in the first schedule in Exhibit 3. The required allowance is $2, which decreases retained earnings and deferred tax as well as accounts receivable (Entry #4, Exhibit 4).

3. Receivable from related party

A large receivable, $412 of the outstanding balance of $1,443 in receivables, is with a company that belongs to a shareholder and is slow in paying. In the past year, adequate collections were received to keep the account less than a year old (i.e., at least the opening balance was paid) but there is risk from such a concentration of accounts receivable. For example, if this were to become uncollectible, the retained earnings balance of Mitrium would be wiped out. While Mitrium has their own shares as collateral in the case of default, it is not clear that a small ownership in Mitrium would indeed be worth in range of $400,000. While this is a sensitive issue because the debtor is a shareholder, Mitrium should consider its credit policies for this customer. They should negotiate a scheme to quickly bring the account receivable into current status. Additional security should be lodged by the debtor in the meantime.

In the allowance for doubtful accounts, no allowance has been provided for this account, in accordance with past practice. Management should review this decision critically. If an allowance were needed, current assets and retained earnings would decline, further weakening the two key ratios and reducing any bonus. However, fair presentation is an overriding concern.Interest should not be recognized until collection, because of slow collection. Interest revenue has been reversed (Entry #3, Exhibit 4). Interest revenue would be recognized when it is collected.

Disclosure of the transaction with this related party must be included in the disclosure notes to the financial statements.

4. Allowance for doubtful accounts

The revised allowance for doubtful account is calculated in the second table in Exhibit 3. The percentage in the “current” category has been changed to reflect the impact of the sales discount program on current receivables, at management’s suggestion. The related party receivable has been excluded. The securitized accounts receivable, with the related allowance of $4, has been included.


The adjustments seem reasonable, but management must review the end result to see if they are comfortable with the resulting allowance.

The calculation indicates an increase to the allowance, and bad debt expense of $179, which decreases accounts receivable and retained earnings. This further weakens the two key ratios and reduces any bonus. Again, fair presentation is overriding (Entry #5 in Exhibit 4).

5. Presentation of cash

In the draft financial statements, cash is shown before outstanding cheques are deducted. This does not follow normal accounting conventions. It also hurts the current ratio, which is not to the advantage of Mitrium. Therefore, the cash account and accounts payable have been decreased by the amount of outstanding cheques (Entry #1, Exhibit 4).

6. Other reporting issues

Mitrium would be pemitted to use the income tax payable method to account for income tax under ASPE. This would reduce deferred tax to zero, and increase earnings and retained earnings. It would improve the debt-to-equity ratio. This policy would also improve the simplicity and understandability of the financial statement. It would be GAAP. No adjustment has been made, because the wishes of the company are not known. This issue should be considered and acted upon, if the company so choses.

Note also that there is no adjustment for bonuses. Since earnings have declined, bonuses will also decline but the percentage is unknown and therefore not included.

7. Ratio compliance

The draft statement of financial position of Mitrium has been restated for the required items, as summarized in Exhibit 4. The revised statement of financial position is shown in Exhibit 2.The target ratios are recalculated in Exhibit 1. As feared, the current ratio, at 1.81, is well below the target of 2. The debt-to-equity ratio is only barely under the ceiling of 12. Mitrium will have to make contact with the lender to discuss the ramifications of the current ratio.

It is worth noting, though, that if the accounts receivable transfer has been accounted for as a sale, and if deferred tax were not recorded in the financial statements, Mitrium would be in much better shape (see the third column of Exhibit 1) Therefore, these numbers should also be presented to the lender, in the hopes that the consequences of the breach can be averted. In future, all transfers of accounts receivable should be negotiated to qualify for derecognition. This may involve different security for the lender who currently has a charge on these receivables.

Exhibit 1


Mitrium Corp. Revised debt covenant ratios

Ratio Definition Mitrium; based on

revised statementsMitrium; potential (1)

Current ratio Current assetsCurrent liabilities

$2,066.5 = 1.81$1,139

$1,860.5 (2) = 1.99$933(3)

Debt/equity Total debtTotal owners’ equity

$8,647 = 11.78$734

$8,374.6 (4) = 10.46$800.4 (5)

(1) Deferred tax eliminated and transfer of AR treated as a sale(2) AR decreased by $206; prepaid interest disregarded(3) Current liabilities reduced by $206(4) Debt reduced by $206 + DT of $66.4(5) RE increased by $66.4


Exhibit 2Mitrium Corp.Revised Draft Statement of Financial Position 31 December 20X8 (in thousands)AssetsCurrent assets:

Cash ($300 - $278)............................................. $22.0Accounts receivable ($1,443 - $42 + $210)....... $1,611Allowance for sales discounts............................ (2)Allowance for doubtful accounts (schedule)...... ( 195) 1,414.0Inventory............................................................ 533.0Prepaid expenses ($96 + $1.5)........................... 97 .5 $2,066.5

Capital assets:Property, plant and equipment............................ 7,293.0

Other assets.............................................................. 22 .0 Total assets................................................... $9,381 .5

LiabilitiesCurrent liabilities:

Bank indebtedness.............................................. $ 405Bank loan securitized with accounts receivable. 206Accounts payable and accrued liabilities ($576 - $278) 298Current portion of long-term debt...................... 230

Total current liabilities................................. $1,139.0Long-term liabilities:

Secured bank debt, 6%....................................... 1,442.0Secured bank debt, floating interest rate............ 6,000.0Deferred tax ($155 +$.6 - $.8 - $16.8 - $71.6)... 66 .4

Total liabilities.............................................. 8,647.4

Owners’ EquityCommon share capital........................................ 583.0Retained earnings ($284 + $.9 - $25.2 - $1.2 - $107.4) 151 .1

Total owners’ equity..................................... 734 .1 Total liabilities and owners’ equity.................... $9,381 .5


Exhibit 3Required Allowances

(1)Date:December 20X8

(2)Sales on account(thousands)

(3)Percentage using sales discountas of December 31

(4)Estimated percentage to use sales discount outstanding53% - (3)

(5)Allowance for sales discounts(4) x (2) x1% discount

15 48.1 24% 29% .1418 81.6 12% 41% .3319 41.3 14% 39% .1620 24.4 9% 44% .1121 22.2 12% 41% .0922 51.4 5% 48% .2527 10.4 4% 49% .0528 78.4 2% 51% .4029 46.4 0% 53% .25

Total 1.78Rounded to 2*

*Due to estimations involved

Status Amount Adjustments Adjusted Amount

PercentageUncoll.

Allowance

Current $ 424 -148 (RPT)(1)-2 Allowance

$274 9%(2) $ 25

Securitized AR -- +210 securitized 210 Per analysis 430 days past due 208 208 8% 16.660 days past due 231 231 10% 23.190+ days past due

580 -264 (RPT(1) 316 40% 126.4

Related party AR ____ +148 +264 - 42 370 0(3)$1,443 1,609(4) 195.1

Rounded 195Current balance 16 (5)Adjustment $179

(1) Related party transaction with grocery store chain owned by shareholder ($106 + $42 = $148) ($412 - $148 = $264) (2) Triple the historic rate(3) To be reviewed by management(4) AR of $1,611 ($1,443 + $210 - $42 interest) less $2 allowance for sales discounts(5) $12 + $4


Exhibit 4 Adjustments to the financial statements

(1) Accounts payable........................................................................ 278,000Cash............................................................................................ 278,000

(2) Accounts receivable.................................................................... 210,000 Prepaid interest ($1.9 x 35/45) rounded..................................... 1,500

Retained earnings ($1.9 x 10/55) = $0.4; ($1.9 - $0.4)(1-.4). . 900 Deferred tax ($1.9 - $0.4)(.4).................................................. 600 Allowance for doubtful accounts............................................ 4,000 Loan payable........................................................................... 206,000

(3) Retained earnings (60%)............................................................. 25,200 Deferred tax (40%)..................................................................... 16,800

Accounts receivable................................................................. 42,000

(4) Retained earnings (60%)............................................................. 1,200 Deferred tax (40%)..................................................................... 800

Allowance for sales discounts.................................................. 2,000

(5) Retained earnings (60%)............................................................. 107,400 Deferred tax (40%)...................................................................... 71,600

Allowance for doubtful accounts............................................. 179,000


Assignments

Assignment 7-1

Requirement 1

A financial instrument is any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument for the other party. A financial asset is either cash or a contractual right to receive cash from another entity.

Requirement 2

Cash is always a FVTPL asset, so its classification is not controversial. The fair value of cash would change if its value were determinable with reference to an exchange rate. This is, its fair value would change if it were foreign currency whose Canadian dollar equivalency changed.

Requirement 3

All financial instruments are initially recorded at fair value, which is the transaction value and establishes cost. FVTPL financial instruments are revalued at fair value at reporting dates, and changes in fair value are recorded as gains or losses in earnings. Assets carried at amortized cost are not revalued, except for amortization of appropriate amounts (discounts and premiums) and for allowances as needed.

Accounts receivable and accounts payable are typically classified as amortized cost financial instruments. To be in this category, two conditions must be satisfied:

1. The objective must be to hold the item to collect (pay) contractual cash flows, and2. Contractual cash flows must be solely for principal and interest.

The element would be FVTPL if these conditions were not met, or if the element was designated by management to be FVTPL. This might happen if the receivable or payable was to be sold to a third party, or if it had to be classisified to avoid an accounting mismatch, likely as part of a hedging strategy.

Requirement 4

Carrying value is amortized cost, but was fair value on initial recognition. Amortized cost should be equal to fair value because the term is short.


Assignment 7-2

Requirement 1

Allowance for doubtful accounts....................................................... 106,200Accounts receivable.................................................................... 106,200

Bad debts expense.............................................................................. 187,300Allowance for doubtful accounts................................................ 187,300($134,900 – $106,200 = $28,700); $216,000 –$28,700 = $187,300

Allowance for sales discounts............................................................ 6,300Sales discounts............................................................................ 6,300($17,200 - $23,500); allowance now too high

Sales returns....................................................................................... 3,800Allowance for sales returns........................................................ 3,800($ 9,500– $5,700)

Requirement 2

Accounts receivable, net...........................................$1,550,100*

*$1,899,000 – $106,200 = $1,792,800 – $216,000 – $17,200– $9,500


Assignment 7-3

Requirement 1

Allowance for sales discounts............................................................ 1,830Sales discounts............................................................................ 1,830($16,590 - $18,420); allowance now too high

Bad debts expense.............................................................................. 107,438Allowance for doubtful accounts................................................ 107,438($28,650,000 x 75% x 1% x 1/2 = $107,438); $55,600 + $107,438 = $163,038

Sales returns....................................................................................... 3,900Allowance for sales returns........................................................ 3,900($16,500 – $12,600)

Requirement 2

Accounts receivable, net..............................................$503,372*

*$699,500– $16,590 – $163,038 – $16,500


Assignment 7-4

Requirement 1

a. Accounts receivable ($816,000 x 60%)............................................. 489,600Cash.................................................................................................... 326,400

Sales............................................................................................ 816,000

b. Cash ($520,000 - $8,000)................................................................... 512,000Sales discounts ($400,000 x .02)....................................................... 8,000

Accounts receivable.................................................................... 520,000

c. Allowance for doubtful accounts........................................................ 8,400Accounts receivable.................................................................... 8,400

d. Accounts receivable............................................................................ 1,100Allowance for doubtful accounts................................................ 1,100

Cash ................................................................................................... 1,100Accounts receivable.................................................................... 1,100

Note: is is also acceptable to do one entry, debiting cash and crediting the allowance for doubtful accounts.

e. Bad debts expense............................................................................... 12,240Allowance for doubtful accounts................................................ 12,240($489,600 x 2.5%)

f. Sales discounts.................................................................................... 700Allowance for sales discounts.................................................... 700($2,700 - $2,000)

Requirement 2Accounts receivable ($225,000 +$489,600 - $520,000 + $1,100 - $1,100 - $8,400)

$ 186,200

Less: Allowance for sales discounts 2,700 Allowance for doubtful accounts ($11,300 -8,400 +$12,240 + $1,100) 16,240

$167,260

Requirement 3At the beginning of the year, the allowance for doubtful accounts is approximately 5% of accounts receivable, net of the allowance for sales discounts. At year end, the allowance is approximately 9% of net accounts receivable. The additional allowance might be needed because of economic conditions, but it must be evaluated against the quality of accounts receivable for reasonableness.


Assignment 7-5

Case 1

Accounts receivable ($785,000 - $43,600) $ 741,400Less: Allowance for sales discounts 16,500 Allowance for doubtful accounts See below 110,385

$ 614,515

Bad debt expense (increase in the allowance account) $ 87,085

Balance in allowance for doubtful accounts:Beginning balance.................................................................. $ 66,900Deduct: write-off ................................................................... ( 43,600)Balance ............................................................................... $ 23,300Increase ($23,300 versus $110,385 needed)........................ 87,085Calculated balance................................................................. $110,385

Calculated balance (aging)Re: Current ($785,000 – $43,600) x .5 = $370,700

Net current ($370,700 - $16,500) x .05................. $17,710Re: Non-current $370,700 x .25............................................ 92,675

$110,385

Case 2

Accounts receivable See below

$ 181,100

Less: Allowance for doubtful accounts ($31,200 - $14,700 + $1,900 + $37,800) 56,200

$124,900

Bad debt expense (4% of $945,000) $ 37,800

Balance in closing accounts receivable:Beginning balance..................................................................$ 147,300Add credit sales...................................................................... 945,000Deduct: collections.............................................................. (896,500)

recovery and collection ( no net effect)................. 0write-off ................................................................ ( 14,700)

Ending balance.......................................................................$ 181,100


Assignment 7-6

Case 1

Accounts receivable See below

$ 1,016,400

Less: Allowance for doubtful accounts (10% of AR; see also below) 101,640

$914,760

Bad debt expense (calculation below) $ 61,740

Balance in closing accounts receivable:Beginning balance..................................................................$1,650,000Add credit sales ($9,710,000 x 80%)..................................... 7,768,000Deduct: collections..............................................................(8,165,000)

sales returns........................................................... (162,000)recovery and collection ( no net effect)................. 0write-off ................................................................ ( 74,600)

Ending balance.......................................................................$1,016,400 Balance in allowance for doubtful accounts:

Beginning balance..................................................................$ 104,000Deduct: write-off ................................................................... ( 74,600)Add: reinstatement................................................................. 10,500Balance ............................................................................... $ 39,900Increase: bad debt expense($39,900 versus $101,640 needed)........................................ 61,740Calculated balance ($1,016,400 x 10%)................................ $101,640

Case 2

Accounts receivable ($891,400 - $37,100 write-off) $ 854,300Less: Allowance for cash discounts 5,200 Allowance for doubtful accounts ($34,300 - $37,100 + $43,200 bad debt expense) 40,400

$ 808,700

Bad debt expense ($6,400,000 x .9 x 0.75%) $ 43,200


Assignment 7-7 (WEB)

Requirement 1

31 December 20x5—Write-off of doubtful accounts:Allowance for doubtful accounts...................................................... 1,000

Accounts receivable (Customer Slo).......................................... 1,000

Requirement 2

31 December 20x5—Adjusting entry to record estimated bad debt expense

Case A—Based on credit sales:Bad debt expense.............................................................................. 1,600

Allowance for doubtful accounts................................................ 1,600

Computation: $160,000 x 1% = $1,600.

Case B—Based on ending balance of accounts receivable:Bad debt expense.............................................................................. 1,200

Allowance for doubtful accounts................................................ 1,200

Computations:Balance in accounts receivable, 31 December 20x5:

Beginning balance.................................................................. $ 51,000Add credit sales...................................................................... 160,000Deduct: collections.............................................................. (170,000)

write-off (Slo)........................................................ ( 1,000)Ending 20x5 balance.............................................................. $ 40,000

Allowance account ($3,000 – $1,000)......................................... $ 2,000 Credit

Balance needed in allowance account ($40,000 x 8%)................ $ 3,200Balance currently in allowance account ($3,000 - $1,000)......... 2,000Increase in allowance account..................................................... $ 1,200

Case C—Based on aging and varying loss rates:Bad debt expense......................................................................... 1,360

Allowance for doubtful accounts........................................... 1,360


Accounts Probability of EstimatedAge Receivable Noncollection Uncollectible

Less than 30 days $28,000 x 2% = $ 56031 to 90 days 7,000 x 10% = 70091 to 120 days 3,000 x 30% = 900More than 120 days 2,000 x 60% = 1,200

Totals $40,000 $3,360Balance required in allowance account................................................................ $3,360Balance in allowance account currently.............................................................. 2,000Increase required in allowance account............................................................... $1,360

Requirement 3Case A Case B Case C

Earnings, 20x5:Bad debt expense $ 1,600 $ 1,200 $ 1,360

Statement of financial position, 20x5:Accounts receivable $40,000 $40,000 $40,000Less: Allowance for doubtful accounts 3,600 3,200 3,360Carrying (book) value $36,400 $36,800 $36,640

Requirement 4

a) Estimated bad debt expense based on composite percent of credit sales—simple, not costly to implement, and emphasizes that only credit sales cause bad debt losses. Focus on earnings and recording expenses. Primary disadvantage is that it does not tend to compensate in the short-term for prior estimating errors.

b) Estimated bad debt expense based on net realizable value of accounts receivable and a composite percent—simple, not costly to implement, emphasizes net realizable value of the accounts receivable (rather than credit sales). Focuses on the statement of financial position and the definition of a current asset. It tends to compensate for prior estimating errors in the short and long term. However, it does not directly consider aging.

c) Estimated bad debt expense based on net realizable value of accounts receivable—emphasizes net realizable value of accounts receivable by age categories. Focuses on the statement of financial position and the definition of a current asset. Tends to compensate for prior estimating errors in the short and long term. Allows for changes: other methods work well when conditions are stable. Primary disadvantage is the time and cost associated with preparing aging schedules.

Requirement 5

1 August 20x6—To record collection of a bad debt previously written off:Accounts receivable (Slo)........................................................................ 1,000

Allowance for doubtful accounts...................................................... 1,000Cash.......................................................................................................... 1,000

Accounts receivable (Slo)................................................................. 1,000


Assignment 7-8

Requirement 1

Allowance for doubtful accounts....................................................... 19,800Accounts receivable.................................................................... 19,800

Balances remaining:Accounts receivable, $383,400 – $19,800 = $363,600Allowance for doubtful accounts, $22,700 – $19,800 = $2,900 credit

Requirement 2

Assumption A Assumption B Assumption CBad debt expense................. 13,275 12,371 12,627

Allowance for doubtful accounts..................... 13,275 12,371 12,627

Computations:

Assumption (a) on credit sales: $2,950,000 x 1/4 x 1.8% = $13,275; Allowance = $2,900 + $13,275 = $16,175

Assumption (b) on total receivables at year-end:

Balance required in allowance account $363,600 x 4.2%............................. $15,271Balance existing in allowance account (credit)............................................... 2,900Increase required..............................................................................................$12,371

Assumption (c) on aging schedule:Not past due........................................................ $210,800 x .8% = $1,686Past due 1-60 days.............................................. 60,000 x 1.8% = 1,080Past due over 60 days......................................... 89,100 x 11% = 9,801Past due over 90 days ($23,500 - $19,800)........ 3,700 x 80% = 2,960Balance required in allowance account.............. 15,527Balance existing in allowance account............... 2,900Increase (credit) required.................................... $12,627

Requirement 3Assumption

A B C Current assets:Accounts receivable $363,600 $363,600 $363,600Less: Allowance for

doubtful accounts 16,175 $347,425 15,271 $348,329 15,527$348,073


Assignment 7-9 - removed

Assignment 7-10

Requirement 1

a. Bad debt expense (.75% x $650,000) 4,875 Allowance for doubtful accounts 4,875Balance in allowance: $3,000 + $4,875 - $5,500 = $2,375 cr.

Evaluation: Should provide appropriate bad debts compared to credit sales but only effective if percentage is appropriate. Must be based on history but also future outlook. Percentage looks low – current write-offs are higher than increase to the allowance.

b. Bad debt expense (.4% x $1,550,000) 6,200 Allowance for doubtful accounts 6,200Balance in allowance: $3,000 + $6,200 - $5,500 = $3,700 cr.

Evaluation: Amount in bad debt expense seems more in line with write-offs but it is not logical to base write-offs on cash sales, since there is no accompanying credit risk. Only effective if percentage is appropriate. c. Bad debt expense (6% x $120,000) = $7,200 + $2,500 dr.* 9,700 Allowance for doubtful accounts 9,700* debit balance in allowance after write-offs, $3,000 - $5,500Balance in allowance: $3,000 + $9,700 - $5,500 = $7,200 cr.

Evaluation: Should follow careful examination of net collectible amount at the end of the year; good for asset valuation. Valuation percentage has to be chosen carefully to provide accuracy. This allowance looks high compared to the other suggestions. Allowance base, total receivables, may be too broad, as aging should be more accurate. d. Bad debt expense 6,820 Allowance for doubtful accounts 6,820((80% x $120,000) x 2%)+((20% x $120,000) x 10%) = $4,320; $4,320+$2,500 = $6,820Balance in allowance: $3,000 + $6,820 - $5,500 = $4,320 cr.

Evaluation: Should follow careful examination of net collectible amount at the end of the year; good for asset valuation. Valuation percentages have to be chosen carefully to provide accuracy. Detailed examination of accounts most likely to provide accurate assessment.

Requirement 2

Based on the evaluation above, the alternative that seems the most accurate and logical is alternative d. Alternative a seems to provide too low a result, b is not logical because cash sales are used in the base, and c seems high.


Assignment 7-11

Requirement 1

Inder IFRS, a transfer of receivables is recorded as a sale (derecognition) if:a. The rights to the cash flows from the assets have expired, or b. The transferor has no continuing involvement in the assets transferred, or c. The finance company has the practical ability to re-transfer the receivables for

its own benefit. Otherwise, the transfer is recorded as a borrowing.

ASPE criteria are different than under IFRS. Under ASPE, if the transferor gives up control, the accounts receivable are derecognized. Otherwise, the transfer is recorded as a borrowing.

Requirement 2

a) Sale (derecognition)Cash.......................................................................................................187,200Financing expense................................................................................. 12,800

Accounts receivable....................................................................... 200,000

b) BorrowingCash.......................................................................................................187,200Discount on note payable...................................................................... 12,800

Note payable.................................................................................. 200,000

Requirement 3

a) Sale (derecognition) Current ratio: ($895,500 +$187,200 - $200,000)/ $407,100 = 2.17

b) Borrowing

Current ratio: ($895,500 +$187,200)/ ($407,100+ $187,200 (net)) = 1.82

Requirement 4

Analysts would reinstate the accounts receivable to get a more complete picture of the business model. Ratios might be more comparable with competitors after reinstatement, and the difference can be material, per requirement 3. Ratios that are particularly affected are debt/equity, current ratio, return on assets, and the length of the cash-to-cash cycle.


Assignment 7-12

Requirement 1

This transaction appears to be a sale of the receivable because of the right to re-transfer (Prima can resell the accounts receivable). The carrying (i.e., book) value of the receivables should be derecognized by XCourt Company. The following sale entry is appropriate:

Cash....................................................................................................... 64,200Financing expense................................................................................. 6,800Allowance for doubtful accounts.......................................................... 4,000

Accounts receivable....................................................................... 75,000

Requirement 2

The criteria for recording as a sale are not met because XCourt retained the right to repurchase receivables. This represents continuing involvement. The transaction must be recorded as a loan:

Cash....................................................................................................... 70,000Discount on note payable...................................................................... 3,000

Note payable.................................................................................. 73,000

No entry is needed for bad debts, because the $2,000 is already in the allowance. It would be premature to write off the accounts at this point. Requirement 3

In Requirement 1, the $71,000 ($75,000 - $4,000 allowance) of accounts receivable are removed from the statement of financial position, and replaced with a lower amount of cash; the reduction in net assets is equal to the $6,800 expense total.

In Requirement 2, the accounts receivable (net) are already reduced by $2,000 for bad debts. Cash increases by $70,000, and a payable increases by $70,000 (net): the discount will be amortized to interest expense.

The biggest difference is obviously that the receivables and payables are still on the books in alternative 2. Ratios that are particularly affected are debt/equity, current ratio, return on assets, and the length of the cash-to-cash cycle.


Assignment 7-13

Case A

Requirement 1

In the absence of information to the contrary, the transfer should be recorded as a sale (derecognition) by Appa. Appa has transferred the receivables, and has no continuing involvement or control over the receivables.

Requirement 2

Appa’s entry:Cash..................................................................................................... 528,000Financing expense............................................................................... 72,000

Accounts receivable..................................................................... 600,000

Case B

Requirement 1

The transfer should be recorded as a loan by Bappa because, Bappa reqtins legal control and the finance company is not permitted to resell the receivables.

Requirement 2

Bappa’s entry:Cash..................................................................................................... 552,000Discount on note payable to Finance Co.*.......................................... 48,000

Note payable to Finance Co......................................................... 600,000

* Assumes all financing fee and no bad debts


Assignment 7-14

Mike Company:

Allowance for doubtful accounts.................................. 29,000 Accounts receivable....................................... 29,000

Accounts receivable ..................................................... 1,200 Allowance for doubtful accounts................... 1,200

Cash.............................................................................. 800 Accounts receivable....................................... 800

Bad debt expense.......................................................... 50,800 Allowance for doubtful accounts................... 50,800

Existing balance: $22,000 - $29,000 + $1,200 = $5,800 debit; $45,000 needed.

Howlett Company:

Accounts receivable ($98,000 x $1.03)......................... 100,940 Sales.............................................................. 100,940

Cost of goods sold........................................................ 62,700 Inventory....................................................... 62,700

Cash ($98,000 x $1.07)................................................. 104,860Exchange gain....................................................... 3,920Accounts receivable............................................... 100,940

Rockwood Ltd:

Cash.............................................................................. 571,285Financing expense ($650,000 - $42,250) x .06.............. 36,465Allowance for doubtful accounts.................................. 42,250

Accounts receivable....................................... 650,000

Sale treatment might be criticized as the company still in fact has accounts receivable and a loan. The statement of financial position does not reflect these financial statement elements and thus does not reflect the entire business cycle.


Assignment 7-15

Case A

Requirement 1

15 April 20x8—Sale of merchandise on credit:Accounts receivable..................................................................... 175,000

Sales revenue........................................................................ 175,000

1 May 20x8—Note received in settlement of account:Note receivable............................................................................ 175,000

Account receivable............................................................... 175,000

30 September 20x8—Adjusting entry:Interest receivable ($175,000 x 5% x 5/12)................................. 3,646

Interest revenue.................................................................... 3,646

30 April 20x9—Collection of note and interest:Cash [$175,000 + ($175,000 x 5%)]............................................ 183,750

Note receivable..................................................................... 175,000Interest receivable (per above)............................................. 3,646Interest revenue ($175,000 x 5% x 7/12)............................. 5,104

Requirement 2

Statement of comprehensive income:Sales revenue............................................................................... 175,000Interest revenue............................................................................ 3,646

Statement of financial position (current):Note receivable............................................................................ 175,000Interest receivable........................................................................ 3,646


Case B

Requirement 1

1 May 20x8—To record sale and non-interest bearing note:Note receivable............................................................................ 110,000

Sales revenue........................................................................ 103,774Discount on notes receivable................................................ 6,226

($110,000 x (P/F, 6%, 1)) = $103,774; $110,000 - $103,774 = $6,226

31 December 20x8—Adjusting entry for interest:Discount on notes receivable....................................................... 4,151

Interest revenue ($103,774 x 6% x 8/12)............................. 4,151

30 April 20x9—Collection of face of the note:Cash.............................................................................................. 110,000Discount on notes receivable....................................................... 2,075

Note receivable..................................................................... 110,000Interest revenue ($103,774 x 6% x 4/12)............................. 2,075

Requirement 2

Statement of comprehensive income:Sales revenue............................................................................................. $103,774Interest revenue.......................................................................................... 4,151

Statement of financial position: (current)Note receivable (net) ($110,000 - $2,075)................................................ 107,925



Requirement 1

1 January 20x5Cash.............................................................................................. 20,000Note receivable............................................................................ 40,000

Sales revenue........................................................................ 60,000

31 December 20x5Cash.............................................................................................. 3,200

Interest revenue ($40,000 x .08)........................................... 3,200

31 December 20x6Cash.............................................................................................. 43,200

Note receivable..................................................................... 40,000Interest revenue.................................................................... 3,200

Requirement 2

Gross Basis

1 January 20x5Cash.............................................................................................. 20,000Note receivable............................................................................ 40,000

Discount on note receivable ($40,000 – $35,721*)............. 4,279Sales revenue........................................................................ 55,721

* Present value of prinipal: $40,000 (P/F, 8%, 2) $34,294 Present value of interest annuity $800 (P/A, 8%, 2) 1,427

$35,721

31 December 20x5Cash.............................................................................................. 800Discount on note receivable......................................................... 2,058

Interest revenue ($35,721 x 8%).......................................... 2,858

31 December 20x6Cash.............................................................................................. 40,800Discount on note receivable ($4,279 – $2,058)........................... 2,221

Note receivable..................................................................... 40,000Interest revenue (($35,721 + $2,058) x 8%), rounded......... 3,021


Requirement 3

Req. 1 Req. 2Interest revenue:

20x5 $ 3,200 $ 2,85820x6 3,200 3,021

Sales revenue:20x5 60,000 55,72120x6 0 0


Assignment 7-17

Requirement 1

Present value:Maturity value $20,000 (P/F, 8%, 3) $15,877Interest $400 (P/A, 8%,3) 1,031

$16,908

Requirement 2

1 January 20x6Note receivable............................................................................ 20,000

Discount on note receivable*............................................... 3,092Sales revenue........................................................................ 16,908

*$20,000 – $16,908

31 December 20x6Cash.............................................................................................. 400Discount on note receivable......................................................... 953

Interest revenue ($16,908 x 8%).......................................... 1,353

31 December 20x7Cash.............................................................................................. 400Discount on note receivable......................................................... 1,029

Interest revenue ($16,908 + $953 = $17,861) x 8%............. 1,429

31 December 20x8Cash.............................................................................................. 20,400Discount on note receivable (remainder)..................................... 1,110

Note receivable..................................................................... 20,000Interest revenue ($17,861 + $1,029) x 8%, rounded............ 1,510

Requirement 3

31 September 20x6Interest receivable ($400 x 9/12)................................................. 300Discount on note receivable ($953 x 9/12).................................. 715

Interest revenue ($16,908 x 8% x 9/12)............................... 1,015


Assignment 7-18

Case A

1 January 20x8—Purchased truck:Truck ($14,000 + PV of note, $46,282*)..................................... 60,282Discount on note payable ($50,000 - $46,282*).......................... 3,718

Cash...................................................................................... 14,000Note payable ........................................................................ 50,000

*Maturity value $50,000 (P/F, 5%, 2) $45,352 Interest $500 (P/A, 5%, 2) 930

$46,282

31 December 20x8—Adjusting entry for interestInterest expense ($46,282 x .05).................................................. 2,314

Cash...................................................................................... 500Discount on note payable..................................................... 1,814

31 December 20x9—End of accounting period and maturity value of loanInterest expense ($46,282 + $1,814) x .05; rounded................... 2,404

Cash...................................................................................... 500Discount on note payable (remainder)................................. 1,904

Note payable................................................................................ 50,000Cash ..................................................................................... 50,000

Case B

1 January 20x8—Purchased bulldozer:Bulldozer ($2,000 + PV of note, $22,250).................................. 24,250Discount on note payable*........................................................... 2,750

Cash...................................................................................... 2,000Note payable ........................................................................ 25,000**$25,000 x (P/F, 6%, 2) = $22,250$25,000 - $22,250

31 December 20x8—Adjusting entry for accrued interest:Interest expense ($22,250 x .06).................................................. 1,335

Discount on note payable..................................................... 1,335

31 December 20x9—End of accounting period and maturity date of note:Interest expense [($22,250 + $1,335) x .06]................................ 1,415

Discount on note payable (remainder)................................. 1,415Note payable ............................................................................... 25,000

Cash...................................................................................... 25,000


Assignment 7-19

Requirement 1

Annual payment = $125,000 / (P/A, 6%, 4) (3.46511) = $36,074 (rounded)

Requirement 2

Payment Openingbalance

6% Interest Component

Principal component

($36,074- Int.)

Closing Balance

1234

Requirement 3

Initial loan:Cash...................................................................... 125,000 Note payable.................................................. 125,000

First payment:Interest expense..................................................... 7,500Note payable.......................................................... 28,574 Cash.............................................................. 36,074

Second payment:Interest expense..................................................... 5,786Notes payable........................................................ 30,288 Cash.............................................................. 36,074

Third payment:Interest expense..................................................... 3,968Note payable.......................................................... 32,106 Cash.............................................................. 36,074

Fourth payment:Interest expense..................................................... 2,042Note payable.......................................................... 34,032 Cash.............................................................. 36,074


Assignment 7-20

Requirement 1

$60,000 note:Cash .................................................................. 60,000 Note payable................................................... 60,000

$40,000 note:Inventory............................................................... 40,000 Note payable.................................................. 40,000

$70,000 note:Equipment ($62,407 + $8,000).............................. 70,407Discount on note payable ($70,000 - $62,407)....... 7,593

Cash.......................................................... 8,000Note payable............................................. 70,000

Principal $70,000 (P/F, 7%, 2) (.87344) $61,141Interest $700 (P/A, 7%, 2) (1.80802) 1,266 $62,407 Requirement 2

Implicit rate = $40,000 / (P/A, x%, 3) = $15,242 ; (P/A, x%, 3) = $40,000/$15,242 = 2.62433;This corresponds to the Table 1-2, n=3, 7% column

Requirement 3

Interest expense, year 1:$60,000 x 7%.......................................................................................................... $4,200$40,000 x 7%.......................................................................................................... 2,800($70,000 - $7,593) x 7% ($700 of cash and $3,669 of discount amortization)...... 4,369

$11,369Interest expense, year 2:$60,000 x 7%.......................................................................................................... $4,200($40,000 + $2,800 - $15,242) = $27,558 x 7%...................................................... 1,929($70,000 - $3,924*) x 7% ($700 of cash and $3,924 of discount amortization).... 4,624 $10,753* Discount amortized in year 1, $3,669.Remaining discount, $7,593 - $3,669 = $3,924

Requirement 4

Note payable, 7% $60,000Note payable, 7% (after first payment) 27,558Note payable, 7% effective interest, net ($70,000 - $3,924) 66,076 $153,634


Assignment 7-21

Requirement 1

1 January 20x5Notes receivable ($15,730 net of discount = PV)........................ 14,000Cost of goods sold........................................................................ 8,000

Inventory................................................................................ 8,000Sales....................................................................................... 14,000

Effective interest rate implicit in the note (i):

$14,000 = $15,730 (P/F, i, 2)$14,000/$15,730 = (P/F, i, 2) = .89i = 6%

31 December 20x5Notes receivable [$14,000(.06)].................................................. 840

Interest revenue...................................................................... 840

This entry may only be made if collection is likely. Interest should perhaps not be accrued, given the request made in early 20x6.

Requirement 2

31 December 20x6Impairment expense..................................................................... 3,086

Allowance for decline in note value (or notes receivable)... . 3,086

Note receivable balance ($14,000 + $840)....................................................... 14,840Present value $15,730 (P/F, 6%, 5) (PV done at end of 20X6; n=5 to 2011)

$15,730 (.74726) ......................................................... 11,754Required allowance account balance ......................................................... $ 3,086

Impairment loss would be $2,246 ($14,000 - $11,754) if no interest had been accrued in 20x5.


Assignment 7-22

Requirement 1

31 December 20x5—Adjusting entry to accrue vacation salaries not yet taken or paid:

Salary expense....................................................................... 6,000Liability for compensated absences................................. 6,000

During 20x6—Vacation time carryover taken and paid:

Liability for compensated absences....................................... 6,000Cash (included in payroll entry)...................................... 6,000

Requirement 2

Total wage expense:20x5: $700,000 + $6,000 = $706,00020x6: $740,000 - $6,000 = $734,000

20x5 statement of financial position:Current liabilities:

Liability for compensated absences......................... $6,000

Retained earnings would have decreased by $6,000.


Assignment 7-23

Cash ..........................................................................................1,890,000Sales revenue......................................................................... 1,800,000GST payable ($1,800,000 x 5%)............................................ 90,000

Cash .......................................................................................... 6,510,000Sales revenue......................................................................... 6,200,000GST payable ($6,200,000 x 5%)............................................ 310,000

Capital assets................................................................................. 625,000GST payable ($625,000 x 5%)...................................................... 31,250

Cash........................................................................................ 656,250

Salaries expense............................................................................ 85,800Employee income tax payable............................................... 7,400EI payable.............................................................................. 1,400CPP payable........................................................................... 1,200Cash........................................................................................ 75,800

Cash ..........................................................................................1,470,000Sales revenue......................................................................... 1,400,000GST payable ($1,400,000 x 5%)............................................ 70,000

Inventory (or purchases)............................................................. 6,100,000GST payable ($6,100,000 x 5%)................................................... 305,000

Cash........................................................................................ 6,405,000

Salaries expense............................................................................ 85,800Employee income tax payable............................................... 7,400EI payable.............................................................................. 1,400CPP payable........................................................................... 1,200Cash........................................................................................ 75,800

Salary expense............................................................................... 6,320CPP payable ($1,200 x 2)...................................................... 2,400EI payable ($1,400 x 2 x 1.4)................................................. 3,920

Employee income tax payable....................................................... 14,800EI payable ($1,400 x 2) + $3,920.................................................. 6,720CPP payable.................................................................................. 4,800

Cash........................................................................................ 26,320

GST payable.................................................................................. 133,750Cash........................................................................................ 133,750

Balance: ($90,000 + $310,000 + $70,000) – ($31,250 + $305,000) = $133,750


Assignment 7-24

Liabilities:GST payable (1).................................................................................. $61,000Income tax deductions payable (2)...................................................... 23,700CPP payable (3)................................................................................... 6,750EI payable (4)...................................................................................... 6,640

(1) $21,500 + $354,000 – ($960,000 x 5%) – $266,500 = $61,000(2) $1,300 + $10,700 + $11,700 = $23,700(3) $950 + $1,400 + $1,500 + employer, $2,900= $6,750(4) $400 + $1,200 + $1,400 + employer, ($2,600 x 1.4) = $6,640



Requirement 1

a) Purchased merchandise (1 April 20x5):Inventory...................................................................................... 10,000

Note payable, 16%.................................................................. 10,000

b) Sale:Notes receivable........................................................................... 16,000

Discount on notes receivable................................................... 3,122Sales........................................................................................ 12,878

Cost of goods sold........................................................................ 8,320Inventory................................................................................. 8,320

$16,000 (P/F, 15%, 2) + $480 (P/A, 15%, 2) = $12,878

c) US-denominated liability:Inventory...................................................................................... 14,681

Accounts payable ($13,580/$.925).......................................... 14,681

d) Bank demand loan:Cash.............................................................................................. 25,000

Bank loan payable................................................................... 25,000

e) To record salaries and employee deductions:Salary expense............................................................................. 50,000

Employee income taxes payable............................................. 15,000EI payable................................................................................ 3,100CPP payable............................................................................ 2,900Union dues payable................................................................. 500Cash......................................................................................... 28,500

To record payroll expenses payable by the employer:Salary expense............................................................................. 7,240

CPP payable............................................................................ 2,900EI payable ($3,100 x 1.4)........................................................ 4,340

f) To record remittance of payroll deductions:Employee income taxes payable.................................................. 14,350EI payable.................................................................................... 7,250CPP payable................................................................................. 5,720Union dues payable...................................................................... 480

Cash......................................................................................... 27,800


g) US-denominated account receivable:Accounts receivable ($23,790/$.914).......................................... 26,028

Sales........................................................................................ 26,028Cost of goods sold........................................................................ 11,110

Inventory................................................................................. 11,110

h) Cash dividends declared but not yet paid:Retained earnings (or dividends)................................................. 14,000

Cash dividends payable........................................................... 14,000

i) Year-end adjustments:Interest expense ($10,000 x .16 x 9/12)..................................... 1,200

Interest payable...................................................................... 1,200Interest receivable ($480 x 11/12)............................................... 440Discount on note receivable ($1,771 – $440).............................. 1331

Interest revenue ($12,278 x .15 x 11/12)................................ 1,771Exchange loss............................................................................... 193

Accounts payable.................................................................... 193($13,580/$.913) = $14,874 – $14,681

Interest expense............................................................................ 1,875Interest payable....................................................................... 1,875$25,000 x .15 x 6/12

Accounts receivable..................................................................... 29Exchange gain......................................................................... 29($23,790/$.913) = $26,057 – $26,028

Requirement 2

Assets:Notes receivable ($16,000 – ($3,122 - $1,331))................................. $14,209Interest receivable............................................................................... 440Accounts receivable (US customer).................................................... 26,057

Liabilities:Interest payable ($1,200 + $1,875)..................................................... $3,075Notes payable, 16%............................................................................. 10,000Accounts payable (US supplier).......................................................... 14,874Bank loan payable............................................................................... 25,000Income tax payable.............................................................................. 650EI payable............................................................................................ 190CPP payable........................................................................................ 80Union dues payable............................................................................. 20Cash dividends payable....................................................................... 14,000


Assignment 7-26

a) Accounts receivable (70,000 x $2.11)................................... 147,700Sales.................................................................................. 147,700

b) Purchases (or inventory) (150,000 x $1.11)........................... 166,500Accounts payable.............................................................. 166,500

c) Purchases (or inventory) (20,000 x $2.13)............................. 42,600Accounts payable.............................................................. 42,600

d) Accounts payable................................................................... 166,500Foreign exchange loss............................................................ 9,000

Cash (150,000 x $1.17)..................................................... 175,500

e) Accounts payable................................................................... 42,600Foreign exchange loss............................................................ 1,400

Cash (20,000 x $2.20)....................................................... 44,000

f) Cash (70,000 x $2.17)............................................................ 151,900Foreign exchange gain...................................................... 4,200Accounts receivable.......................................................... 147,700


Assignment 7-27

Requirement 1

Cash............................................................................................... 514,500Sales revenue......................................................................... 490,000GST payable........................................................................... 24,500

Salary expense............................................................................... 58,500EI payable.............................................................................. 1,900CPP payable........................................................................... 1,100Employee income tax payable............................................... 6,100Cash........................................................................................ 49,400

Salary expense............................................................................... 3,760EI payable ($1,900 x 1.4)....................................................... 2,660CPP payable........................................................................... 1,100

Inventory (or purchases)................................................................ 760,000GST payable ($760,000 x 5%)...................................................... 38,000

Accounts payable................................................................... 798,000

Cash ($1,648,500 x 98%)..............................................................1,615,530Credit card fees expense ($1,648,500 x 2%)................................. 32,970

Sales revenue......................................................................... 1,570,000GST payable ($1,570,000 x 5%)............................................ 78,500

Accounts receivable ($88,000 x $1.03)......................................... 90,640Sales revenue......................................................................... 90,640

The US customer has been billed in US dollars, and $88,000 is owing.

Cash ($70,000 x $1.07)................................................................. 74,900Accounts receivable ($70,000 x $1.03)................................. 72,100Foreign exchange gains and losses........................................ 2,800

Notes receivable............................................................................ 67,000Discount on notes receivable ($67,000 - $62,017)............ 4,983Sales.................................................................................. 62,017

PV of note = ($67,000 x (P/F 5%,2)) + ($67,000 x 1%) x (P/A 5%,2)= $62,017

GST Payable................................................................................. 96,400Cash ($31,400 + $24,500 + $78,500 - $38,000).................. 96,400

Accounts payable.......................................................................... 478,800


Cash (60% of $798,000)........................................................ 478,800

Accounts receivable...................................................................... 540Foreign exchange gains and losses........................................ 540

($88,000 - $70,000) = $18,000 still owing. Recorded at $1.03; now worth $1.06$18,000 x $.03 = $540

Requirement 2

Accounts receivable 19,080 dr. (1)Notes receivable, net 62,017 dr. (2)Accounts payable 319,200 cr. (3)CPP payable 4,150 cr. (4)EI payable 7,160 cr. (5)Income tax deductions payable 14,260 cr. (6)

(1) $90,640 - $72,100 + 540(2) $67,000 - $4,983(3) $798,000- $478,800(4) $1,950 + $1,100 + $1,100 (5) $2,600 + $1,900 + $2,660 (6) $8,160 + $6,100


Assignment 7-28

1. Sales discounts ($45,000 - $80,000)............................................ 35,000Allowance for sales discounts.............................................. 35,000

2. Allowance for doubtful accounts................................................. 198,000Accounts receivable............................................................. 198,000

Balance = $158,050 - $198,000 = $39,950 dr.

Bad debt expense......................................................................... 340,330Allowance for doubtful accounts......................................... 340,330..............................................................................................

$1,800,000 - $198,000 = $1,602,000 x .8 = ($1,281,600 - $80,000) x .05 = $ 60,080 x .2 = $320,400 x .75 = 240,300

Desired balance $ 300,380Existing balance 39,950 drAdjustment $340,330

3. Exchange loss............................................................................... 4,000Account receivable – US...................................................... 4,000

($116,000/$1.16 = $100,000 x 1.12 = $112,000; adjustment of $4,000 needed

4. Miscellaneous credits ($225,000 x .96)....................................... 216,000Financing expense ($225,000 x .04)............................................ 9,000

Special accounts receivable.................................................. 225,000

5. Notes receivable........................................................................... 70,000Sales..................................................................................... 62,784Discount on notes receivable................................................ 7,216

Present value:Maturity value $70,000 (P/F, 8%, 3) $55,568

Interest $2,800 (P/A, 8%,3) 7,216$62,784

Interest receivable ($2,800 x 2/12).............................................. 467Discount on notes receivable....................................................... 370

Interest revenue ($62,784 x 8% x 2/12)............................... 837

6. Compensated absence liability..................................................... 14,600Salary expense, etc............................................................... 14,600

(30 x 1.5 x $2,200) + (15 x 2 x $2,200) + (4 x 3 x $3,500) = $207,000versus $221,600; $14,600 difference.


Assignment 7-29

Requirement 1

Bank Reconciliation, 31 December 20x2

Bank BooksBalances, 31 December................................................................... $42,390 $17,970Additions:

Oustanding deposit.................................................................... 6,100Account receivable collected.................................................... 8,210Loan increase............................................................................ 14,500Deposit recording error ($690 - $960)...................................... 270Bank error................................................................................. 1,050

Deductions:Cheques outstanding ($16,200 + $165,000 - $172,400)......... (8,800 ) Utility bill payment.................................................................. (190)Bank service charge................................................................. ___(20)

Correct cash balance....................................................................... $40,740 $40,740

Requirement 2

Journal entries from bank reconciliation:

Cash............................................................................................ 22,980Account receivable............................................................... 8,210Notes payable....................................................................... 14,500Accounts receivable (payment on account).......................... 270

Utilities expense......................................................................... 190Bank service charge expense...................................................... 20

Cash........................................................................................ 210


Assignment 7-30

Requirement 1Bank Reconciliation, 30 April

Bank BooksBalances, 30 April........................................................................... $47,870 $19,140Additions:

Oustanding deposit.................................................................... 5,600Account receivable collected.................................................... 5,500Bank loan.................................................................................. 10,000

Deductions:Cheques outstanding

($1,670, $335, $440, $16,100, $450, $7,900).................... (26,895)Supplier payment..................................................................... (4,900)Interest payment...................................................................... (1,200)Insurance payment................................................................... (1,560)Error correction ($4,450 - $4,045)........................................... _____ (405 ) Correct cash balance................................................................ $26,575 $26,575

Requirement 2

Journal entries from bank reconciliation:

Cash............................................................................................ 15,500Account receivable............................................................... 5,500Notes payable....................................................................... 10,000

Insurance expense (or prepaid)................................................... 1,560Interest expense.......................................................................... 1,200Accounts payable........................................................................ 4,900Accounts payable........................................................................ 405

Cash........................................................................................ 8,065


Assignment 7-31

Requirement 1

Balance per bank ($31,570 + $58,550 - $29,975)....... $60,145Additions: Outstanding deposits ($3,210 + $1,750)............... 4,960

Bank error.............................................................. 175

Deductions: Outstanding cheques ($1,245, $650, $75, $165, $10,420) (12,555)

Adjusted balance.......................................................... $52,725

Balance per books ($34,995 + $54,860 - $44,790)...... 45,065Additions:

Direct deposit from customer................................. 1,750 Error in recording cheque………………………. 6,000Deductions:

Service charges...................................................... (90 ) Adjusted balance.......................................................... $52,725

Requirement 2

Cash 1,750 Accounts receivable 1,750

Miscellaneous expense 90 Cash 90

Cash 6,000 Automobile 6,000



Requirement 1

a) Deposits In transit—All deposits (#51 through #56) except #56 have been recorded by the bank; therefore, the deposit in transit is: #56, $3,500. This amount can be verified as: $2,000 + $190,000 – $188,500 = $3,500.

b) Cheques outstanding: Inspection of the cheque numbers reveals that the following are outstanding: #121, $1,000; #177, $2,500; #178, $3,000; and #179, $1,500; total, $8,000. This amount can be verified as: $6,000 + $198,000 – $196,000 = $8,000.

Requirement 2

Bank Reconciliation, 31 December

Bank BooksBalances, 31 December................................................................... $76,550 $55,600*Additions:

Deposit in transit (#56)............................................................. 3,500Account receivable collected.................................................... 6,720Customer deposit...................................................................... 10,000

Deductions:Cheques outstanding (#121, #177–179).................................. (8,000 ) NSF cheque, Customer Belinda............................................... (200)United Fund transfer................................................................ (50)Bank service charge................................................................. ___(20)

Correct cash balance....................................................................... $72,050 $72,050* $56,000 - $400. Or, $400 may be included as a reconciling item, added to the bank.

The cash balance is reported on the statement of financial position as $72,450 ($72,050 + $400)

Requirement 3

Journal entries from bank reconciliation:a) Cash............................................................................................ 16,720

Account receivable............................................................... 6,720Unearned income.................................................................. 10,000

b) Account receivable, Customer Belinda...................................... 200Contributions, United Fund........................................................ 50Expense, bank service charge..................................................... 20

Cash......................................................................................... 270


Appendix Assignment 7-1Note: The appendix, assignment material and compound interest tables are avaliable on the OLC.

Situation APresent value of an annuity due:

$35,000 ÷ (P/AD, 7%, 5) (4.38721) = $7,978

Situation BFuture value of an annuity due:

$200 x (F/AD, 6%, 20) (38.993) = $7,799.

Situation CPresent value of an ordinary annuity:

$8,000 ÷ (P/A, 4%, 8) (6.73274) = $1,188 (rounded).

Situation DFuture value of an ordinary annuity:

$11,969 ÷ $2,000 = 5.9845, table value for FV of an ordinary annuity of n = 5; i = ?%Reference to F/A table, line n = 5, shows 5.9847 under 9%; therefore, the approximate interest rate was 9%.

Situation EPresent value of an ordinary annuity:

$14,308 ÷ $800 = 17.885, P/A table value for an ordinary annuity, n = 24; i = ?%.

Reference to P/A table, line n = 24, shows 17.88499 under 2.5%; therefore, the monthly rate is 2.5%, and the annual rate is 30% (compounded monthly).


Appendix Assignment 7-2

Note: The appendix, assignment material and compound interest tables are avaliable on the OLC.

a) 1. $27,553 [ $120,000/(P/A, 6pds, 10%)]; ($120,000/4.35526)2. $24,404 [$120,000/(P/A, 6pds, 6%)]; ($120,000/4.91732)3. $25,048 [$120,000/(P/AD, 6pds, 10%)]; ($120,000/4.79079)4. $23,022 [$120,000/(P/AD, 6pds, 6%)]; ($120,000/5.21236)

b) 1. 16% ($40,000/$10,856) 3.68459; close to 6 period line in P/A table2. 7% ($40,000/$5,323) 7.51456; close to 10 period line in P/AD table3. 20 pds ($40,000/$4,074) 9.81836; close to 8% column in P/A table4. 14 pds ($40,000/$4,936) 8.10373; close to 10% column in P/AD table



Requirement 1

1. $23,982 [$100,000/(P/AD, 5pds, 10%)]; ($100,000/4.16987) 2. $26,380 [$100,000/(P/A, 5pds, 10%)]; ($100,000/3.79079)

Requirement 2

1. (1) (2) (3) (4)Beginning Ending

Date Principal Interest Principal Principal

1 January 20x4 $100,000 $ 0 $(23,982) $76,0181 January 20x5 76,018 7,602 (16,380) 59,6381 January 20x6 59,638 5,964 (18,018) 41,6201 January 20x7 41,620 4,162 (19,820) 21,8001 January 20x8 21,800 2,182* (21,800) 0

Calculations:(2) Interest = (1) x 10%(3) Principal = $23,982 – (2)(4) Ending principal = (1) – (3)*Adjusted $2 for rounding errors

2. (1) (2) (3) (4)Beginning Ending

Date Principal Interest Principal Principal

31 December 20x4 $100,000 $10,000 $(16,380) $83,62031 December 20x5 83,620 8,362 (18,018) 65,60231 December 20x6 65,602 6,560 (19,820) 45,78231 December 20x7 45,782 4,578 (21,802) 23,98031 December 20x8 23,980 2,400* (23,980) 0

Calculations:(2) Interest = (1) x 10%(3) Principal = $26,380 – (2)(4) Ending principal = (1) – (3)*Adjusted $2 for rounding errors



a) 1. $31,753 [$40,000 x (P/F, 3pds, 8%)]; ($40,000 x 0.79383)2. $31,612 [$40,000 x (P/F, 6pds, 4%)]; ($40,000 x 0.79031)3. $31,540 [$40,000 x (P/F, 12pds, 2%)]; ($40,000 x 0.78849)

b) 1. $16,149 [$4,000 x (P/AD, 5pds, 12%)]; ($4,000 x 4.03735)2. $16,058 *3. $14,419 [$4,000 x (P/A, 5pds, 12%)]; ($4,000 x 3.60478)4. $14,292 *

* These are annual payments but semi-annual compounding; annuity tables can only be used if the payment and compounding points are identical. Therefore, the lump sum tables must be used.

Payment P/F factor Total P/F factor Total1. $4,000 0pds, 6% 1.0 $4,000 2pds, 6% 0.89000 $ 3,5602. 4,000 2pds, 6% 0.89000 3,560 4pds, 6% 0.79209 3,1683. 4,000 4pds, 6% 0.79209 3,168 6pds, 6% 0.70496 2,8204. 4,000 6pds, 6% 0.70496 2,820 8pds, 6% 0.62741 2,5105. 4,000 8pds, 6% 0.62741 2,510 10pds, 6% 0.55839 2,234

$16,058 $14,292

c) (1) (2) (3)Principal Interest Total

1. $100,000 1 $30,000 $130,000 6

2. 92,014 2 37,986 130,0003. 108,904 3 21,096 130,0004. 99,622 4 30,378 130,0005. 91,411 5 38,589 130,000

1 [$6,000 x (P/A, 4pds, 6%)] + [$106,000 x (P/F, 5pds, 6%)];($6,000 x 3.46511) + ($106,000 x 0.74726)

2 [$6,000 x (P/A, 4pds, 8%)] + ($106,000 x (P/F, 5pds, 8%)];($6,000 x 3.31213) + ($106,000 x 0.68058)

3 [$6,000 x (P/A, 4pds, 4%)] + [$106,000 x (P/F, 5pds, 4%)]($6,000 x 3.62990) + ($106,000 x 0.82193)

4,5 There are annual payments but semi-annual compounding; annuity tables can only be used if the payment and compounding points are identical. Therefore, the lump sum tables must be used.


Payment P/F factor Total P/F factor Total1. $6,000 2pds, 3% 0.94260 $ 5,656 2pds, 4% 0.92456 $ 5,5472. 6,000 4pds, 3% 0.88849 5,331 4pds, 4% 0.85480 5,1293. 6,000 6pds, 3% 0.83748 5,025 6pds, 4% 0.79031 4,7424. 6,000 8pds, 3% 0.78941 4,736 8pds, 4% 0.73069 4,3845. 106,000 10pds, 3% 0.74409 78,874 10pds, 4% 0.67556 71,609

$99,622 $91,411

6 ($6,000 x 4) + $106,000 = $130,000

d) 1. $239,2022. $164,946

Payment PV factor Total PV factor Total1. $40,000 P/A, 5pds, 6% 4.21236$168,494 P/A, 5pds, 16% 3.27429$130,9722. 20,000 P/A, 5pds, 6% 4.21236 P/A, 5pds, 16% 3.27429

P/F, 5pds, 6% 0.74726 62,955*P/F, 5pds, 16% 0.47611 31,178*3. 10,000 P/F, 11pds, 6% 0.52679 5,268 P/F, 11pds, 16% 0.19542 1,9544. 5,000 P/F, 12pds, 6% 0.49697 2,485 P/F, 12pds, 16% 0.16846 842

$239,202 $164,946

* Alternate calcuation approach: Take present value of a ten-period annuity, and subtract the present value of the (first) five year annuity. The result is the same. For example:((P/A, 10 pds, 6%) less (P/A 5pds, 6%)) = (7.36009 less 4.21236) x $20,000 = $62,955.




1. This case involves the future value of an annuity because funds are increased by compound interest.

a) Future value of an ordinary annuity (end-of-period rents):$7,000 x (F/A, 6%, 16) (25.673) = $179,711

b) Future value of an annuity due (beginning-of-period rents):$7,000 x (F/AD, 6%, 16) (27.213) = $190,491

Verification: F/AD = F/A x (1 + i); $179,711 x 1.06 = $190,494 (rounding)

2. This case involves the present value of an annuity because the debt payments are in the future.

a) Present value of annuity due (beginning-of-period rents):$59,000 ÷ (P/AD, 6%, 12) (8.88687) = $6,639

b) Present value of ordinary annuity (end-of-period rents):$59,000 ÷ (P/A, 6%, 12) (8.38384) = $7,037

3. Cost of machine:Cash payment........................................................................................ $ 9,000Present value of ordinary annuity:

$13,400 x (P/A, 6%, 5) (4.21236).................................................... 56,446Cost of machine.......................................................................... $65,446

4. Present value of ordinary annuity:$18,000 x (P/A, 6%, 10) (7.36009)....................................................... $132,482

Present value of 1:$6,500 x (P/F, 6%, 10) (.55839)........................................................... 3,630

Reasonable estimated value............................................................. $136,112




1) Future value of 1:(a) Annual compounding:

$30,000 x (F/P, 16%, 5) (2.100) = $63,000

(b) Semiannual compounding:$30,000 x (F/P, 8%, 10) (2.159) = $64,770

(c) Quarterly compounding:$30,000 x (F/P, 4%, 20) (2.191) = $65,730

2) Present value of 1:(a) Annual discounting:

$20,000 x (P/F, 12%, 5) (.56743) = $11,349(b) Semiannual discounting:

$20,000 x (P/F, 6%, 10) (.55839) = $11,168(c) Quarterly discounting:

$20,000 x (P/F, 3%, 20) (.55368) = $11,074

3) Future value of 1:

$12,798 ÷ $6,000 = 2.133, table value for future value of 1, n = 13; i = ?%. Reference to F/P table, line n = 13, shows 2.133 under 6%; therefore, the compound interest rate is 6%.

4) Present value of 1:

$5,864 ÷ $15,000 = .39093, table value for present value of 1 for i = 11%; n = ? Reference to P/F table, column i = 11%, shows .39092 on line n = 9; therefore, the number of periods is 9.

5) Future value of an ordinary annuity: $6,000 x (F/A, 9%, 10) (15.193) = $91,158.

6) Future value of an annuity due: $9,000 x (F/AD, 7%, 10) (14.784) = $133,056.

7) Present value of an ordinary annuity: $40,000 x (P/A, 10%, 5) (3.79079) = $151,632.

8) Present value of an annuity due: $8,000 x (P/AD, 14%, 5) (3.91371) = $31,310.

9) Future value or ordinary annuity: $552,026 ÷ $60,000 = 9.20043, table value for future value of an ordinary annuity, n = 7; i = ?%.


Reference to F/A table, line for n = 7, shows 9.20043 under the 9% column; therefore, the implicit interest rate is 9%.

10) Present value of ordinary annuity: $141,366 ÷ $30,000 = 4.7122, table value for present value of ordinary annuity, i = 11%; n = ?Reference to P/A table, for i = 11%, shows 4.71220 on line for n = 7; therefore, the implicit number of year-end cash payments is 7.

11) Step 1 Fund balance needed on 1 January year 11:$30,000 x (P/A, 10%, 5) (3.79079) = $113,724 = Y.

Step 2 Single deposit required on 1 January Year 1 to obtain fund balance on 1 January Year 11:$113,724 x (P/F, 10%, 10) (.38554) = $43,845 = X


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