ACCTG 331, Intermediate Accounting

Questions 1 (5 points) Entries for bad debt expense.

The trial balance before adjustment of Risen Company reports the following balances:

Dr. Cr.

Accounts receivable $150,000

Allowance for doubtful accounts $ 2,500

Sales (all on credit) 850,000

Sales returns and allowances 40,000

Instructions

Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 6% of gross accounts receivable and (2) 1% of net sales.

(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a) under both methods? (show the new journal entries)

Questions 2 (15 points) Amortization of discount on note.

On December 31, 2014, Green Company finished consultation services and accepted in exchange a promissory note with a face value of $600,000, a due date of December 31, 2017, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%.

Instructions

Determine the present value of the note.

Prepare a Schedule of Note Discount Amortization for Green Company under the effective interest method using the following template. (Round to whole dollars.)

Date (cash interest) (effeective interest) (discount amortized) (unamortized discount balance) (present value of note)

12/31/14

12/31/15

12/31/16

12/31/17

(c) Prepare the journal entries for Green Company for fiscal year 2014 and fiscal year 2015.

Now assume that Green Company choose to apply fair value option at the end of 2014 and the interest rate of this note changes from 10% to 12% by the end of 2015. What is the fair value of the note at the end of year 2015? Prepare the journal entry for fiscal year 2014 and fiscal year 2015.