Question

1) What legislation requires the implementation and attestation of internal controls for publicly traded companies?

2) What two principles of GAAP apply to accounting for bad debts?

3) October 1, a company purchases a building for $160,000, $10,000 salvage value, and 15-year useful life. On October 1 of year 6, the asset book value is $110,000, and management determines the salvage value should be $25,000 instead of $10,000.

3A. What should depreciation be for the last 3 months of the year?

3B. Record depreciation for the Part A.

4) At the end of the year, the company reported: Total sales of $375,000 of which $67,500 were cash sales. Accounts receivable balance is $37,000. Allowance for Doubtful Accounts had a beginning credit balance of $3,025, and $2,325 were written off during the year.

4A. What is the balance in Allowance for Doubtful Accounts at the end of the year before adjusting entry?

4B. What is the adjusting entry if bad debts are estimated to be 2% of Accounts receivable?

4C. What is the adjusting entry if bad debts are estimated to be 3.5% of credit sales?

Answer 1

1) Sarbanes - Oxley Act of 2002 requires the implementation and attestation of internal controls for publicly traded companies.

2) Two principles which mandate accounting of bad debts are

a. Matching - The expenses relating to a revenue needs to be recognised in the same year as revenue

b. Conservatism - While recognising revenue one must act in conservative manner and account for any probable revenue loss (allowance for bad debts)

3)

3A)

There is change is accounting estimate of salvage value.

Book value on October 1 of 6th year = 110,000

5 years have elapsed and 10 years of life is remaining

Revised salvage value = 25,000

Revised depreciation for remaining 3 months = (110,000 - 25,000)/10 x 3/12

= 2,125

3B)

Accounting Entry

Depreciation expense $2,125

To Accumulated depreciation $2,125

(Depreciation for last 3 months accounted as per revised estimates)

4)

4A. Balance at end of year before any adjusting entry = $3,025 - $2,325 = $700

4B. Accounts receivable = $37,000

Allowance for bad debts = $37,000 x 2% = $740

Extra allowance to be accounted = $740 - $700 = $40

Entry is

Bad debts expense $40

Allowance for bad debts $40

(Allowance for bad debts accounted for current year to make it 2% of receiveables)

4C.

Here it is given as 3.5% of credit sales, we must take that as credit sales outstanding at year end (i.e. 3.5% of accounts receivable)

So allowance required = 3.5% x $37,000 = $1,295

Allowance to be provided current year = $1,295 - $700 = $595

Entry

Bad debts expense $595

Allowance for bad debts $595

(Allowance for current year accounted making it 3.5% of credit sales outstanding)

Note :

Alternatively, if we take it literally for 4C

Credit Sales = Total Sales - Cash sales = $375,000 - $67,500

= $307,500

Estimated bad debts = 3.5% of $307,500 = $10,762.5

Allowance to be recognised in current year = $10,762.5 - $700

= $10,062.5

Entry will be

Bad debts expense $10,062.5

Allowance for bad debts $10,062.5

But this seems to be unrealistic, so this literal interpretation is far from practical