Question

Execusmart Consultants has provided business consulting services for several years. The company has been using the percentage of credit sales method to estimate bad debts but switched at the end of the first quarter this year to the aging of accounts receivable method. The company entered into the following partial list of transactions.

1. During January, the company provided services for $350,000 on credit.
2. On January 31, the company estimated bad debts using 1 percent of credit sales.
3. On February 4, the company collected $175,000 of accounts receivable.
4. On February 15, the company wrote off a $450 account receivable.
5. During February, the company provided services for $300,000 on credit.
6. On February 28, the company estimated bad debts using 1 percent of credit sales.
7. On March 1, the company loaned $16,000 to an employee, who signed a 9% note due in 3 months.
8. On March 15, the company collected $450 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 the following aging analysis, which includes the preceding transactions (as well as others not listed). Prior to the adjustment, Allowance for Doubtful Accounts had an unadjusted credit balance of $9,000.

				Number of Days Unpaid
Customer		Total		0–30			31–60			61–90			Over 90
Arrow Ergonomics	$	1,600		$	800		$	700		$	100
Asymmetry Architecture		3,500											$	3,500
Others (not shown to save space)		106,700			40,700			54,000			6,500			5,500
Weight Whittlers		3,500			3,500
Total Accounts Receivable	$	115,300		$	45,000		$	54,700		$	6,600		$	9,000
Estimated Uncollectible (%)					2	%		20	%		30	%		40	%

Required:

1. For items (a)–(j), analyze the amount and direction (+ or –) of effects on specific financial statement accounts and the overall accounting equation. TIP: In item (j), you must first calculate the desired ending balance before adjusting the Allowance for Doubtful Accounts. (Do not round intermediate calculations. Enter any decreases to Assets, Liabilities, or Stockholders Equity with a minus sign.)

	Assets = Liabilities + Stockholders’ Equity a. b. c. d. e. f. g. h. i. j.

Answer 1

Solution:

Event	Assets		=	Liabilities		+	Stockholder's Equity
a	Accounts receivables	$3,50,000					Service revenue	$3,50,000
b	Allowance for doubtful accounts	-$3,500					Bad debts expense	-$3,500
c	Cash	$1,75,000
	Accounts receivables	-$1,75,000
d	Allowance for doubtful accounts	$450
	Accounts receivables	-$450
e	Accounts receivables	$3,00,000					Service revenue	$3,00,000
f	Allowance for doubtful accounts	-$3,000					Bad debts expense	-$3,000
g	Note receivables	$16,000
	Cash	-$16,000
h	Accounts receivables	$450
	Allowance for doubtful accounts	-$450
	Cash	$450
	Accounts receivables	-$450
i	Interest receivables ($16000*9%*1/12)	$120					Interest revenue	$120
j	Allowance for doubtful accounts ($17420-9000)	-$8,420					Bad debts expense	-$8,420

Working Note:

Computation of allowance for estimated uncollectibles - Execusmart consultants
Customer	Total Balance	0-30 days	31-60 days	61-90 days	Over 90 days
Total Receivables	$1,15,300	$45,000	$54,700	$6,600	$9,000
Percentage uncollectibles		2%	20%	30%	40%
Allowance for doubtful accounts	$17,420	$900	$10,940	$1,980	$3,600