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PRACTICAL ACCOUNTING PROBLEMS I SUGGESTED SOLUTIONS Accounts, Loan Receivable and Impairment 1. Accounts receivable 1/1 Credit sales Collections on credit sales Recoveries Collection on recoveries Accounts written off Sales returns Accounts receivable 12/31 Less: Allowance for doubtful accounts and sales returns Net realizable value or carrying amount 2. Allowance for doubtful accounts 1/1 Recoveries Write-off Balance before adjustment Provision (SQUEEZE) Required allowance per aging (500 + 300 + 500 + 500) 3. Allowance for doubtful account 1/1 Write-off Recoveries Balance before adjustment Provision (9.5M 1.5M) x 5% Allowance for doubtful account 12/31 4. Allowance before adjustment (debit balance) Doubtful accounts expense (SQUEEZED) Allowance for doubtful accounts 12/31/13 (5M x 8%) 5. Carrying amount of loan and interest receivable (7,500,000 + 900,000) Less: Present value of remaining cash flows at 12% Loan impairment loss 2,000,000 10,000,000 ( 8,000,000) 50,000 ( 50,000) ( 100,000) ( 500,000) 3,400,000 450,000 2,950,000 1,000,000 100,000 ( 400,000) 700,000 1,100,000 1,800,000 200,000 (300,000) 50,000 ( 50,000) 400,000 350,000 ( 50,000) 600,000 400,000 8,400,000 *5,225,000 3,175,000

(500,000 x .89) + (1,000,000 x .80) + (2,000,000 x .71) + (4,000,000 x .64) = 5,225,000 Journal entry: Loan impairment loss 3,175,000 Interest receivable Allowance for loan impairment Balance sheet presentation: Loans receivable Less: Allowance for loan impairment Carrying amount (present value of cash flows) Interest income in 2013 (5,225,000 x 12%) Journal entries: Cash Loans receivable Allowance for loan impairment Interest income Balance sheet presentation: Loans receivable Less: Allowance for loan impairment Carrying amount (present value of cash flows) --END-7,000,000 1,648,000 5,352,000 627,000 627,000 500,000 500,000 900,000 2,275,00

7,500,000 2,275,000 5,225,000 627,000 A

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