Question

In: Accounting

Web Wizard, Inc., has provided information technology services for several years. The company uses the percentage...

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 selected transactions during the first quarter of 2017:

  1. During January, the company provided services for $40,000 on credit.
  2. On January 31, the company estimated bad debts using 1 percent of credit sales.
  3. On February 4, the company collected $20,000 of accounts receivable.
  4. On February 15, the company wrote off a $100 account receivable.
  5. During February, the company provided services for $30,000 on credit.
  6. On February 28, the company estimated bad debts using 1 percent of credit sales.
  7. On March 1, the company loaned $2,400 to an employee who signed a 6 percent note, due in six months.
  8. On March 15, the company collected $100 on the account written off one month earlier.
  9. On March 31, the company adjusted for uncollectable 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 $1,200.
  10. On March 31, the company accrued interest earned on the note.
Customer Total 0-30 31-60 61-90 Over 90
    Altavista Tourism $ 200 $ 100 $ 80 $ 20
    Bayling Bungalows 400    $ 400
    Others (not shown to save space) 17,000 6,800 8,400 1,000 800
    Xciting Xcursions 400 400
  Total Accounts Receivable $ 18,000 $ 7,300 $ 8,480 $ 1,020 $ 1,200
  
  Estimated uncollectable (%) 2 % 10 % 20 % 40 %

1-a. For items (a) through (j), analyze the amount and effects on specific financial statement accounts and the overall accounting equation. (Enter any decreases to the account with a minus sign.)

-b. Prepare the journal entries for the above items. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
2. Show how the receivables related to these transactions would be reported in the current assets section of a classified balance sheet. (Amounts to be deducted should be indicated by a minus sign.)

3. Name the accounts related to Accounts Receivable and Note Receivable that would be reported on the income statement and indicate whether they would appear before or after Income from Operations.

Solutions

Expert Solution

1a:

Event Assets = Liabilities + Stockholder's Equity
a Accounts receivables $4,00,000.00 Service revenue $4,00,000.00
b Allowance for doubtful accounts -$4,000.00 Bad debts expense -$4,000.00
c Cash $20,000.00
Accounts receivables -$20,000.00
d Allowance for doubtful accounts $100.00
Accounts receivables -$100.00
e Accounts receivables $30,000.00 Service revenue $30,000.00
f Allowance for doubtful accounts -$300.00 Bad debts expense -$300.00
g Note receivables $2,400.00
Cash -$2,400.00
h Accounts receivables $100.00
Allowance for doubtful accounts -$100.00
Cash $100.00
Accounts receivables -$100.00
i Interest receivables $12.00 Interest revenue $12.00
J Allowance for doubtful accounts (1678-1200) -$478.00 Bad debts expense -$478.00

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 $18,000.00 $7,300.00 $8,480.00 $1,020.00 $1,200.00
Percentage uncollectibles 2% 10% 20% 40%
Allowance for doubtful accounts $1,678.00 $146.00 $848.00 $204.00 $480.00

1b:

Journal Entries
Event Particulars Debit Credit
a Accounts receivables Dr $4,00,000.00
      To Service revenue $4,00,000.00
(To record services provided on credit)
b Bad debts Expense Dr $4,000.00
      To Allowance for doubtful accounts $4,000.00
(To record bad debts expense)
c Cash Dr $20,000.00
      To Accounts receivables $20,000.00
(To record collection of receivables)
d Allowance for doubtful accounts Dr $100.00
      To Accounts receivables $100.00
(To write off receivables)
e Accounts receivables Dr $30,000.00
      To Service revenue $30,000.00
(To record services provided on credit)
f Bad debts Expense Dr $300.00
      To Allowance for doubtful accounts $300.00
(To record bad debts expense)
g Notes receivables Dr $2,400.00
      To Cash $2,400.00
(Loan given to employee against note)
h1 Accounts receivables Dr $100.00
      To Allowance for doubtful accounts $100.00
(To reinstate debtor account)
h2 Cash Dr $100.00
      To Accounts receivables $100.00
(To record collection from customer previously written off)
i Interest receivables Dr $12.00
      To Interest revenue ($2400*6%*1/12) $12.00
(To record interest revenue)
j Bad debts Expense Dr ($1,678-$1,200) $478.00
      To Allowance for doubtful accounts $478.00
(To record bad debts expense)

2:

Web Wizard Inc. (Partial Balance Sheet)
At March 31
Assets Amount
Current Assets:
Accounts receivables - Gross $18,000.00
Allowance for doubtful accounts $1,678.00
Accounts receivables, net of allowance $16,322.00
Note Receivables $2,400.00
Interest receivables $12.00

3.

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

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