Question

XYZ Company sells electronic parts. Most transactions with customers are immediately paid with cash or check. However, XYZ has five major customers that can purchase on credit. These approved customers routinely buy on credit. The terms of the credit provide that payment must occur within 30 days, and each customer has a maximum credit limit of RO. 10,000.

The following information is about each of the 5 credit customers’ transactions during month of May:

Customers	Transactions information
Customer A	At the beginning of the May, Customer A account has RO. 1,403. On May 5, he purchases on account for RO. 7,237. On May 17, paid RO. 1,403.
B	Beginning balance, RO. 5,275. On May 15, Purchase on account for RO. 2,275. On May 26, made a payment of RO. 4,275.
C	Beginning balance, RO. 0. On May 9, Purchase on account for RO. 9,550.
D	Beginning balance, RO. 7,557. On May 7, Purchase on account RO. 2,100. On May 22, Purchase on account RO. 9,444. On May 11, he made a payment of RO. 7,557.
E	Beginning balance, RO. 2,990. On May 18, Paid RO. 2,990.

Instructions:

1. Prepare a subsidiary accounts receivable ledger account for each of XYZ’s customers.

      

2. Prepare the general ledger Accounts Receivable “control” account. Be sure the total in this account reconciles to the sum of the individual balances in the subsidiary ledgers.

      

3. What is the purpose of a subsidiary ledger? What other control accounts might be supported by subsidiary ledgers? (To answer this part, words must be at least 100 words).                                                                                                                                  (1.5 Marks)
4. Review XYZ’s subsidiary ledgers and identify which customer should be put on close watch and monitor for being irresponsible, and which customer has exceeded their credit limit. Justify. (To answer this part, words must be at least 100 words).                          (1.5 Marks)

Answer 1

1.

Customer #A Ledger
Date	Particulars	Debit	Date	Particulars	Credit
1st May	Beginning Amount	1403	17th May	Cash	1403
5th May	Accounts Receivable Control	7237	31st May	Ending Balance	7237
		8640			8640
Customer #B Ledger
Date	Particulars	Debit	Date	Particulars	Credit
1st May	Beginning Amount	5275	26th May	Cash	4275
15th May	Accounts Receivable Control	2275	31st May	Ending Balance	3275
		7550			7550
Customer #C Ledger
Date	Particulars	Debit	Date	Particulars	Credit
1st May	Beginning Amount	0	17th May
9th May	Accounts Receivable Control	9550	31st May	Ending Balance	9550
		9550			9550
Customer #D Ledger
Date	Particulars	Debit	Date	Particulars	Credit
1st May	Beginning Amount	7557	11th May	Cash	7557
7th May	Accounts Receivable Control	2100	31st May	Ending Balance	11544
22nd May	Accounts Receivable Control	9444
		19101			19101
Customer #E Ledger
Date	Particulars	Debit	Date	Particulars	Credit
1st May	Beginning Amount	2990	18th May	Cash	2990
		2990			2990

(2)

Accounts Receivable Control
Date	Particulars	Debit	Date	Particulars	Credit
	Cash		1st May	Beginning Amount:(1403+5275+7557+2990)	17225
17th May	Customer #A	1403		Purchases
26th May	Customer #B	4275	5th May	Customer #A	7237
11th May	Customer #D	7557	15th May	Customer #B	2275
18th May	Customer #E	2990	9th May	Customer #C	9550
31st May	Ending Amount	31606	22nd May &9th May	Customer #D(2100+9444)	11544

The Accounts Receivable general ledger account balance of $34,606 is in agreement with the sum of the individual subsidiary accounts ($7237 + $3275 + $9550 + $11544 =$34606). This is an important reconciliation that should occur on a regular basis. Modern computer systems, including data base driven processes, have greatly reduced the frustration of maintaining subsidiary accounts that synchronize with control accounts.

(3) Subsidiary ledgers provide detailed information about the transactions with specific customers, vendors, and so forth. They enable one to know exactly what comprises a general ledger account balance. This information is very useful for many purposes, including preparing monthly billing statements for specific customers. Subsidiary ledgers might also be maintained for accounts payable, cash (if multiple bank accounts are in use), property assets (to track individual items of equipment in use by the business), capital stock (to track ownership of individual shareholders), and the like.

(4) Customer #B is delinquent. This customer owed $5275 at the beginning of May, but only paid $4275 during the month. A portion of the beginning balance has been outstanding for more than the agreed 30-day period. Customer #Ds balance exceeds the $10,000 credit limit.