Question

At the end of 2017 fiscal year, L&Z Co. has the following information:

Balance Sheets

Current Assets

Accounts receivable, net of allowance of $1,076                               $16,194

a)   During 2018, the company wrote off $200 of specific accounts that were deemed uncollectable. Prepare the journal entry to record the write-off of these accounts receivable. (4 pts)

b) At the end of 2018 (12/31/2018), management estimate 8% of account receivables balance will likely be difficult to collect. The company’s Accounts Receivable has a gross ending balance of $17,600 . Prepare the journal entry to record bad debt expense for 2018 using the percentage of receivables method (the balance sheet approach). (8 pts)

c)  If credit sales for 2018 were $118,000, compute the amount of cash collected from customers in 2018 (note: take into account the event in part a). (6 pts)

d) On Oct 1^st , 2018, the company sold coal to Beta Electric, receiving a 6-month, noninterest-bearing note for $100,000. The effective interest rate on the note is 8%. The company has a fiscal year-end of 12/31. (10 pts)

1. i. Prepare the journal entry to record the sale. (6 pts)

ii. Prepare adjusting journal entries regarding the note receivable on 12/31/2018. (4 pts)

Answer 1

		Amount($)	Amount($)
a.	Allowance for Doubtful accounts	200
	To accounts receivable		200
	Note : Being $200 uncollectable and written off
b.	Accounts Receivable	17,600
	To Sales		17,600
	Note : Recording Sales revenue at end of 2018
	Bad Debts on accounts receivable	1,408
	To Allowance on doubtful debts		1,408
	Note : Recording estimated bad debts of 8% on sales of $17,600/-. 8% of $17,600 = $1,408/-
c.	Cash	117,800
	To accounts receivable		117,800
	Note: the $200/- were uncollectable and written-off
d. Oct 1st	Notes receivable	96,153.85
	To Sales		96,153.85
	Note : Since the company sold coal for a 6 month non-interest bearing note, the interest component is reduced, to record the sale at present value. The present value(PV) is calculated as Future Value = Present value(1+r%/12) to the power t i.e number of months.Future value is $100,000/-. 100,000 = PV(1+0.0067) to the power 6. Hence present value is 100,000/1.04 = 96,153.85/-. The interest for 2 months, Nov 18 and Dec 18 is recorded in the next entries
Nov 1st	Notes Receivable	644.23
	To Interest revenue		644.23
	Note : Being interest for 1 month recorded i.e 0.67% on 96,153.85/- = $644.23/-
Dec 1st	Notes Receivable	648.55
	To interest revenue		648.55
	Current value of receivable is 96,153.85+644.23 = $96,798.08/-. So 1 month interest on 96,798.08*0.67% = $648.55/-

Interest calculation for next 4 months is as below. But since year end is 12/31/2018, entries are shown upto December 2018.

3 = 96798.08+648.55 = 97446.63*0.67% = 652.89

4 = 97446.63+652.89 = 98099.52*0.67% = 657.27

5 = 98099.52+657.27=98756.79*0.67% = 661.67

6 = 98756.79+661.67 = 99418.46*0.67% = 666.1 = 100,084.56/-