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Final

Final Review-with solutions.docx


Department
Management
Course Code
MGT220H5
Professor
Yue Li
Study Guide
Final

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MGT220H5 – Final Exam Review
Please note that this review is intended for the purpose of complementing your
independent study. It is in no way intended to represent the entire amount of
information covered in lectures.
Chapter 7: Cash and Receivables
1) Peter agreed to issue a 4 year non-interest bearing note with face value of $2,000 and
an implied rate of interest of 8% on January 1, 2010 to replace the current accounts
receivable.
a) Prepare the journal entry to record the note receivable as well as the year end adjusting
journal entries under both the effective interest method and straight line method.
ANSWER:
PV = $2,000/(1.08^4) = $1,470
January 1, 2010:
Dr. Note Receivable $1,470
Cr. Accounts Receivable $1,470
Effective Interest Method:
Accrual of interest for 2010 = $1,470 x 8% = $118
Dr. Note Receivable $118
Cr. Interest income $118
Straight-Line Method:
Discount on Note = $2,000 - $1,470 = $530
Annual Amortization of Discount = $530/4 = $133
Dr. Note Receivable $133
Cr. Interest income $133
b) Now, suppose instead, Peter issued a 4-year $2,000 note with a stated rate of 8%.
However, at this time, the market rate was 10%. Prepare the journal entry to record the
note receivable as well as the year end adjusting journal entries under both the effective
interest method and straight line method.
ANSWER:
PV = PV Interest + PV Principal = $1,873
PV interest = ($2,000 x 8% x 3.16986)= 507.17
PV Principal=($2,000 x 0.68301) = 1366.02
January 1, 2010:
Dr. Note Receivable $1,873
Cr. Account Receivable $1,873
Effective Interest Method:
Page 1

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Cash Received Interest Income
(10%)
Discount
Amortized
Carrying Amount
of Note
Date of Issue $1,873
End of Year 1 $160 $187 $27 $1,900
Dr. Note Receivable $27
Dr. Cash $160
Cr. Interest Income $187
Straight-Line Method:
Discount on Note = $2,000 - $1,873 = $127
Annual Amortization of Discount = $127/4 = $32
Dr. Note Receivable $32
Dr. Cash $160
Cr. Interest Income $192
2) Information :
Gross Accounts Receivable (end of year) = $140,000
Credit Sales = $110,000
a) Prepare the year end adjusting journal entry assuming that 3% of credit sales will be
uncollectible.
ANSWER:
If 3% of credit sales are uncollectible, the amount of the adjustment required is $3,300 (3% x
$110,000)
Dr. Bad Debts Expense $3,300
Cr. Allowance for Doubtful Accounts $3,300
b) Now, assume using the percentage of receivables. The ending balance for the previous
year of Allowance for Uncollectible Amounts was $2000. Over the year of operation, the
firm wrote off $1000 of A/R as uncollectible and restated $2000 of A/R that were
previously written off. Based on the current economic conditions, the firm estimates that
3% of the gross accounts receivable at year end will be uncollectible. Prepare the year
end adjusting journal entry.
ANSWER:
If 3% of ending A/R will be uncollectible, the ending balance in the allowance account must be
$4,200 ($140,000 x 3%).
The initial balance of the Allowance account has a credit of 2000, during the year there was a
Debit of 1000 (of the write off) and credit of 2000 – the restating of a previously written off bad
debt. The balance without the adjusting entry will be a 3000 credit. Hence the adjusting amount
will equal 4200-3000=1200
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Dr. Bad Debts Expense $1,200
Cr. Allowance $1,200
Page 3
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