Question

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Web Wizard, Inc. has provided information technology services for several years. The company uses the percentage of credit sales method to estimate bad debts for internal monthly reporting purposes. At the end of each quarter, the company adjusts its records using the aging of accounts receivable method. The company entered into the following partial list of transactions during the first quarter.

a.	During January, the company provided services for $42,000 on credit.
b.	On January 31, the company estimated bad debts using 1 percent of credit sales.
c.	On February 4, the company collected $21,000 of accounts receivable.
d.	On February 15, the company wrote off a $200 account receivable.
e.	During February, the company provided services for $32,000 on credit.
f.	On February 28, the company estimated bad debts using 1 percent of credit sales.
g.	On March 1, the company loaned $2,800 to an employee who signed a 6% note, due in 6 months.
h.	On March 15, the company collected $200 on the account written off one month earlier.
i.	On March 31, the company accrued interest earned on the note.
j.	On March 31, the company adjusted for uncollectible accounts, based on an aging analysis (below). Allowance for Doubtful Accounts has an unadjusted credit balance of $1,220.

				Number of Days Unpaid
Customer	Total			0–30			31–60			61–90			Over 90
Alabama Tourism	$	200		$	120		$	70		$	10
Bayside Bungalows		420											$	420
Others (not shown to save space)		17,500			7,000			8,600			1,200			700
Xciting Xcursions		380			380
Total Accounts Receivable	$	18,500		$	7,500		$	8,670		$	1,210		$	1,120
Estimated uncollectible (%)					2	%		10	%		20	%		35	%

Required:
1.	For items (a)–(j), analyze the amount and direction (+ or − ) of effects on specific financial statement accounts and the overall accounting equation. (Enter any decreases to account balances with a minus sign.)

2.	Prepare the journal entries for items (a)–(j). (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

     

Answer 1

1.

S.NO	Assets					=	Liabilities	+	Share Holders Equity
	Cash	Note Receivable	Interest Receivable	Accounts Receivable	Provision For Doubtful Debt		Creditors			Account Head
a				42,000			-		42,000	Service Revenue
b					(420)		-		(420)	Bad Debt Expense
c	21,000			(21,000)			-
d				(200)	200		-
e				32,000			-		32,000	Service Revenue
f					(320)		-		(320)	Bad Debt Expense
g	(2,800)	2,800					-		-
h	200						-		200	Bad Debt Recovered A/c
i			14				-		14	Interest Income A/c
j					(431)				(431)	Bad Debt Expense

Particulars		Days
CUSTOMER	TOTAL ($)	0-30	31-60	61-90	Over 90
		$	$	$	$
Alabama Tourism	200	120	70	10
Bayside Bungalows	420				420
Others (not shown to save space)	17,500	7,000	8,600	1,200	700
Xciting Xcursions	380	380
Total Accounts Receivable = A	18,500	7,500	8,670	1,210	1,120
Estimated Uncollectible (%) = B		2%	10%	20%	35%
Estimated Uncollectible ($) = A x B	1,651	150	867	242	392

Note : 1 Calculation of Adjustment
Allowance for Doubtful Debt - Required	1,651
Less : Balance Present	(1,220)
Adjustment	431

2.

Journal in the books
Date	Particulars		Debit	Credit
			Amount	Amount
			($)	($)
a	Accounts Receivable A/c	Dr.	42,000
	To Service Revenue A/c			42,000
	(Being Services Provided on Credit)
b	Bad Debt Expense A/c	Dr.	420
	To Provision for Doubtful Debt A/c			420
	(Being 1% provision provided)
c	Cash A/c	Dr.	21,000
	To Accounts Receivable A/c			21,000
	(Being amount collected)
d	Provision for Doubtful Debt A/c	Dr.	200
	To Accounts Receivable A/c			200
	(Being written off)
e	Accounts Receivable A/c	Dr.	32,000
	To Service Revenue A/c			32,000
	(Being Services Provided on Credit)
f	Bad Debt Expense A/c	Dr.	320
	To Provision for Doubtful Debt A/c			320
	(Being 1% provision provided)
g	Note Receivable A/c	Dr.	2,800
	To Cash A/c			2,800
	(Being loan given to employee and Received a 6 month Note for same)
h	Cash A/c	Dr.	200
	To Bad Debt Recovered A/c			200
	(Being Bad Debt previously written off now recovered)
i	Interest Receivable A/c	Dr.	14
	To Interest Income (2,800 x 6% x 1/12)			14
	(Being Interest for 1 month accrued)
j	Bad Debt Expense A/c	Dr.	431
	To Provision for Doubtful Debt A/c			431
	(Being Adjustment made)

Note : The Balance in Bad Debt Expense A/c shall be Debited to Statement of Profit and Loss.

Regards