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    Defining cash and equivalents; journal entries for bad debts

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    Stowe Enterprises owns the following assets at December 31, 2007.

    Cash in bank - savings account 63,000
    Checking account balance 17,000
    Cash on hand 9,300
    Postdated Checks 750
    Cash refund due from IRS 31,400
    Certificates of deposit (180 day) 90,000

    What amount should be reported as cash?

    (DON'T NEED TO DO THIS ONE) 7-4. Battle Tank, Inc. had net sales in 2007 of $1,200,000. At December 31, 2007, before adjusting entries, the balances in selected accounts were: Accounts Receivable $250,000 debit, and Allowance for Doubtful Accounts $2,100 credit. If Battle Tank estimates that 2% of its net sales will prove to be uncollectible, prepare the December 31, 2007, journal entry to record bad debt expense.

    2. 7-5. Use the information presented in BE7-4 for Battle Tank, Inc.
    1. Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debts expense.
    2. Instead of estimating uncollectibles at 2% of net sales, assume Battle Tank prepares an aging schedule that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debts expense.

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    Solution Preview

    1. The definition of cash is usually termed 'cash and cash equivalents'. Following is a good definition:

    Cash includes money an entity holds and money deposited with financial institutions that can be withdrawn without notice. Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value ...

    Solution Summary

    The solution defines cash and cash equivalents for reporting on the balance sheet. Amounts that don't fit the category are excluded with an explanation.

    Journal entries for estimated bad debts under three methods of calculation are included in the solution as well as an explanation of which method of calculation is preferred.