Question

Web Wizard, Inc., has provided information technology services for several years. For the first two months of the current year, the company has used the percentage of credit sales method to estimate bad debts. At the end of the first quarter, the company switched to the aging of accounts receivable method. The company entered into the following partial list of transactions during the first quarter.

1. During January, the company provided services for $41,000 on credit.
2. On January 31, the company estimated bad debts using 2 percent of credit sales.
3. On February 4, the company collected $20,500 of accounts receivable.
4. On February 15, the company wrote off a $150 account receivable.
5. During February, the company provided services for $31,000 on credit.
6. On February 28, the company estimated bad debts using 2 percent of credit sales.
7. On March 1, the company loaned $2,600 to an employee, who signed a 6% note, due in 6 months.
8. On March 15, the company collected $150 on the account written off one month earlier.
9. On March 31, the company accrued interest earned on the note.
10. 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 $1,210.

					Number of Days Unpaid
Customer		Total		0–30			31–60			61–90			Over 90
Alabama Tourism	$	230		$	110		$	90		$	30
Bayside Bungalows		410											$	410
Others (not shown to save space)		17,400			6,900			8,500			1,100			900
Xciting Xcursions		390			390
Total Accounts Receivable	$	18,430		$	7,400		$	8,590		$	1,130		$	1,310
Estimated Uncollectible (%)					3	%		10	%		20	%		30	%

1. For items (a)–(j), analyze the transaction to determine effects on specific financial statement accounts and the overall accounting equation. (Enter any decreases to Assets, Liabilities, or Stockholders Equity with a minus sign. Do not round intermediate calculations.)

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. Do not round intermediate calculations.)

3. Show how Accounts Receivable, Notes Receivable, and their related accounts would be reported in the current assets section of a classified balance sheet at the end of the quarter on March 31. (Do not round intermediate calculations.)

4. Sales Revenue and Service Revenue are two income statement accounts that relate to Accounts Receivable. Name two other accounts related to Accounts Receivable and Notes Receivable that would be reported on the income statement and indicate whether each would appear before, or after, Income from Operations.

Answer 1

1.

Assets	=	Liabilities	+	Stockholder's Equity
Accounts receivables	$41,000.00					Service revenue	$41,000.00
Allowance for doubtful accounts	-$820.00					Bad debts expense	-$820.00
Cash	$20,500.00
Accounts receivables	-$20,500.00
Allowance for doubtful accounts	$150.00
Accounts receivables	-$150.00
Accounts receivables	$31,000.00					Service revenue	$31,000.00
Allowance for doubtful accounts	-$620.00					Bad debts expense	-$620.00
Note receivables	$2,600.00
Cash	-$2,600.00
Accounts receivables	$150.00
Allowance for doubtful accounts	-$150.00
Cash	$150.00
Accounts receivables	-$150.00
Interest receivables	$13.00					Interest revenue	$13.00
Allowance for doubtful accounts	-$490.00					Bad debts expense	-$490.00

Working note:

Computation of allowance for estimated uncollectibles - Web Wizard
Customer	Balance	0-30 days	31-60 days	61-90 days	Over 90 days
Total Receivables	$18,430.00	$7,400.00	$8,590.00	$1,130.00	$1,310.00
Percentage uncollectibles		3%	10%	20%	30%
Allowance for doubtful accounts	$1,700.00	$222.00	$859.00	$226.00	$393.00

2.

Journal Entries
Event	Particulars	Debit	Credit
a	Accounts receivables Dr	$41,000.00
	To Service revenue		$41,000.00
	(To record services provided on credit)
b	Bad debts Expense Dr	$820.00
	To Allowance for doubtful accounts		$820.00
	(To record bad debts expense)
c	Cash Dr	$20,500.00
	To Accounts receivables		$20,500.00
	(To record collection of receivables)
d	Allowance for doubtful accounts Dr	$150.00
	To Accounts receivables		$150.00
	(To write off receivables)
e	Accounts receivables Dr	$31,000.00
	To Service revenue		$31,000.00
	(To record services provided on credit)
f	Bad debts Expense Dr	$620.00
	To Allowance for doubtful accounts		$620.00
	(To record bad debts expense)
g	Notes receivables Dr	$2,600.00
	To Cash		$2,600.00
	(Loan given to employee against note)
h1	Accounts receivables Dr	$150.00
	To Allowance for doubtful accounts		$150.00
	(To reinstate debtor account)
h2	Cash Dr	$150.00
	To Accounts receivables		$150.00
	(To record collection from customer previously written off)
i	Interest receivables Dr	$13.00
	To Interest revenue ($2600*6%*1/12)		$13.00
	(To record interest revenue)
j	Bad debts Expense Dr ($1,700-$1,210	$490.00
	To Allowance for doubtful accounts		$490.00
	(To record bad debts expense)

3.

Web Wizard Inc. (Partial Balance Sheet)
At March 31
Assets		Amount
Current Assets:
Accounts receivables - Gross	$18,430.00
Allowance for doubtful accounts	$1,700.00
Accounts receivables, net of allowance		$16,730.00
Note Receivables		$2,600.00
Interest receivables		$13.00

4.

Web Wizard would report:
Bad debts expense	before	Income from operations
Interest revenue	after	Income from operations