Question

Hummus Company began operations on January 1, Year 1. Selected ending balances for Year 1 are:

Accounts receivable, $5,600

Allowance for doubtful accounts, $790

Hummus Company experienced the following events during Year 2:

              Earned $225,000 of revenue on account

              Collected $175,000 cash from accounts receivable

              Paid in advance a one-year lease for office rent, $12,000; rental period began May 1, Year 2

Salary expense was $45,000, of which $40,000 had been paid at the end of Year 2

              Operating expenses were $125,000, of which $100,000 had been paid at the end of Year 2

              Wrote off $2,000 of uncollectible accounts

Adjusted the accounting records to reflect management’s belief that 3% of sales on account will be

uncollectible. Hummus Company uses the allowance method for accounting for bad debts.

Collected $500 from accounts that had been previously written off

(3 points) Question 1 – What is Hummus Company’s net income for Year 2?

(3 points) Question 2 – What is the net realizable value that Hummus Company will report on its Year 2 balance sheet (after all adjusting entries have been made)?

Answer 1

1)		Income Statement
		Revenue			$ 225,000.00
	Less:	Expenses
		Rent Expense ($ 12000 x 8/12)			$     8,000.00
		Salary Expense			$   45,000.00
		Operating Expense			$ 125,000.00
		Bad Debt Expense			$     6,750.00
		Net Income			$   40,250.00

2)	Net Realizable Value
	Accounts Receivable			$ 53,600.00
Less:	Allowance for Doubtful Accounts			$   6,040.00
				$ 47,560.00

Workings:

Accounts Receivable
Beg. Bal	$     5,600.00	Cash	$ 175,000.00
Revenue	$ 225,000.00	Write Off	$     2,000.00
Recovered	$        500.00	Cash	$        500.00
	$                 -	End. Bal	$   53,600.00
	$ 231,100.00		$ 231,100.00
Allowance for Doubtful Accounts
Write Off	$     2,000.00	Beg. Bal	$        790.00
		Recovered	$        500.00
End. Bal	$     6,040.00	Bad Debt	$     6,750.00
	$     8,040.00		$     8,040.00

Do let me know if you find anything incorrect