Question

In: Accounting

You have just been hired as the accountant for Fan-Tastic Sports Gear, a wholesaler of sporting...

You have just been hired as the accountant for Fan-Tastic Sports Gear, a wholesaler of sporting goods and apparel. The previous accountant left abruptly, and an accounting intern has been drafting the journal entries since January. You are examining the accounting records before finalizing the journal entries for the first quarter. Some of the accounts receivable transactions that you are reviewing follow. PAGE 11 JOURNALACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 Jan. 17 Sales 9,700.00 ↓ 2 Bad Debt Expense 9,700.00 ↑ 3 17 Bad Debt Expense 9,700.00 ↓ 4 Accounts Receivable-CJ’s Sports 9,700.00 ↓ 5 21 Cash 10,700.00 ↑ 6 Bad Debt Expense 2,200.00 ↓ 7 Accounts Receivable-Four Seasons Sportswear 12,900.00 ↓ 8 Feb. 15 Accounts Receivable-Healthy Running 3,000.00 ↑ 9 Bad Debt Expense 500.00 ↓ 10 Sales 3,500.00 ↑ 11 Mar. 4 Accounts Receivable-Four Seasons Sportswear 2,200.00 ↑ 12 Bad Debt Expense 2,200.00 ↑ 13 4 Cash 2,200.00 ↑ 14 Bad Debt Expense 2,200.00 ↑ 15 13 Cash 5,540.00 ↑ 16 Accounts Receivable-Barb’s Best Gear 5,540.00 ↓ 17 31 Bad Debt Expense 20,970.00 ↓ 18 Accounts Receivable-Healthy Running 5,350.00 ↓ 19 Accounts Receivable-The Locker Room 4,100.00 ↓ 20 Accounts Receivable-CJ’s Sports 2,780.00 ↓ 21 Accounts Receivable-Get Your Gear 7,050.00 ↓ 22 Accounts Receivable-Ready-2-Go 1,690.00 ↓

CHART OF ACCOUNTS
Fan-Tastic Sports Gear
General Ledger
ASSETS
110 Cash
111 Petty Cash
121 Accounts Receivable-Healthy Running
122 Accounts Receivable-The Locker Room
123 Accounts Receivable-CJ’s Sports
124 Accounts Receivable-Get Your Gear
125 Accounts Receivable-Four Seasons Sportswear
126 Accounts Receivable-Ready-2-Go
127 Accounts Receivable-Barb’s Best Gear
132 Notes Receivable-Fast Feet Co.
136 Interest Receivable
141 Merchandise Inventory
145 Office Supplies
151 Prepaid Insurance
181 Land
193 Office Equipment
194 Accumulated Depreciation-Office Equipment
LIABILITIES
210 Accounts Payable
211 Salaries Payable
213 Sales Tax Payable
214 Interest Payable
215 Notes Payable
EQUITY
310 Rama Gupta, Capital
311 Rama Gupta, Drawing
REVENUE
410 Sales
610 Interest Revenue
EXPENSES
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
523 Delivery Expense
524 Repairs Expense
529 Selling Expenses
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense-Office Equipment
533 Insurance Expense
534 Office Supplies Expense
536 Credit Card Expense
537 Cash Short and Over
538 Bad Debt Expense
539 Miscellaneous Expense
710 Interest Expense

-Finalize the journal entries shown on the Fan-Tastic Sports Gear panel and make any necessary changes. Refer to the Chart of Accounts for the exact wording of account titles. You may also use any items from the preceding list, if needed.

- In the trial balance for March, you see that Notes Receivable-Fast Feet Co. has a negative balance of $165, which would seem to indicate that Fast Feet paid too much. Looking back through the journal entries for March, you find that on March 19 the accounting intern recorded receipt of $8,415 in payment of this note receivable. Further investigation reveals that on November 19, 20Y1, this note receivable was received from Fast Feet Co. for $8,250. You can find no additional information about this note in the accounting records. Assume a 360 day year.

-Using the preceding information, compute the term and the interest rate of the note receivable from Fast Feet.

1. Term of the note: days

2. Interest rate of the note: %

- Fan-Tastic Sports Gear recorded $3,000,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 80% of sales were on account, with over 400 customer accounts. Bad debt expense was $26,187.

1. Assume that Fan-Tastic Sports Gear used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,240. The company estimated uncollectible accounts expense using the percent of credit sales method and expected 0.85% of credit sales to be uncollectible. What is the amount of the adjusting entry to provide for doubtful accounts on December 31? Round all computations to the nearest dollar.
2. How much higher (lower) would Fan-Tastic Sports Gear’s net income have been under the allowance method assumption in (1) than under the direct write-off method? (Enter “0” if there is no change.) by
3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement?

Solutions

Expert Solution

Part 1: Correction of Journal entries:

DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY
1 Jan. 17 Cash 110 9,600.00
2 Bad Debt Expense 538 9,600.00
3 17 Bad Debt Expense 538 9,600.00
4 Accounts Receivable-CJ’s Sports Corp. 123 9,600.00
5 21 Cash 110 10,700.00
6 Bad Debt Expense 538 2,200.00
7 Accounts Receivable-Four Seasons Sportswear Co. 125 12,900.00
8 Feb. 15 Accounts Receivable-Healthy Running Inc. 121 3,000.00
9 Bad Debt Expense 538 0
10 Sales 410 3,000.00
11 Mar. 4 Cash 110 2,200.00
12 Bad Debt Expense 538 2,200.00
13 4 Cash 110 2,200.00
14 Bad Debt Expense 538 2,200.00
15 13 Cash 110 5,540.00
16 Accounts Receivable-Barb’s Best Gear 127 5,540.00
17 31 Bad Debt Expense 538 20,970.00
18 Accounts Receivable-Healthy Running Inc. 121 5,150.00
19 Accounts Receivable-The Locker Room 122 4,100.00
20 Accounts Receivable-CJ’s Sports Corp. 123 2,780.00
21 Accounts Receivable-Get Your Gear Inc. 124 7,050.00
22 Accounts Receivable-Ready-2-Go 126 1,890.00

Part 2:

Interest on notes receivables accrued till 31st Dec, 20X7
DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY
1 Dec. 31 Interest Receivable 136 47.25
2 Interest Revenue 612 47.25

Amount of interest accrued calculations:

Total interest amount = (4635-4500 ) = 135

Total period of note: 19-Nov 2017 to 19-Mar-2018, i.e. 120 days.

Rate of interest = 135/4500 = 3% for 120 days

Interest upto 31-Dec-2017, i.e. 42 days = 4500*(0.03*42/120) = 47.25

Part 3:

Receipt of payment agianst the note on 19th March, 20X8
DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY
1 Mar. 19 Cash 4635
2 Interest Receivable 47.25
3 Interest Revenue 87.75
4 Notes Receivable-Fast Feet Co. 132 4500

Interest revenue for the period from 1-Jan-2018 to 19-Mar-2018, i.e. 78 days = 4500*(0.03*78/120) = 87.75


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