Question

You have just been hired as the accountant for Fan-Tastic Sports Gear, a wholesaler of sporting goods and apparel. The previous accountant left abruptly, and an accounting intern has been drafting the journal entries since January. You are examining the accounting records before finalizing the journal entries for the first quarter. Some of the accounts receivable transactions that you are reviewing follow. PAGE 11 JOURNALACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 Jan. 17 Sales 9,700.00 ↓ 2 Bad Debt Expense 9,700.00 ↑ 3 17 Bad Debt Expense 9,700.00 ↓ 4 Accounts Receivable-CJ’s Sports 9,700.00 ↓ 5 21 Cash 10,700.00 ↑ 6 Bad Debt Expense 2,200.00 ↓ 7 Accounts Receivable-Four Seasons Sportswear 12,900.00 ↓ 8 Feb. 15 Accounts Receivable-Healthy Running 3,000.00 ↑ 9 Bad Debt Expense 500.00 ↓ 10 Sales 3,500.00 ↑ 11 Mar. 4 Accounts Receivable-Four Seasons Sportswear 2,200.00 ↑ 12 Bad Debt Expense 2,200.00 ↑ 13 4 Cash 2,200.00 ↑ 14 Bad Debt Expense 2,200.00 ↑ 15 13 Cash 5,540.00 ↑ 16 Accounts Receivable-Barb’s Best Gear 5,540.00 ↓ 17 31 Bad Debt Expense 20,970.00 ↓ 18 Accounts Receivable-Healthy Running 5,350.00 ↓ 19 Accounts Receivable-The Locker Room 4,100.00 ↓ 20 Accounts Receivable-CJ’s Sports 2,780.00 ↓ 21 Accounts Receivable-Get Your Gear 7,050.00 ↓ 22 Accounts Receivable-Ready-2-Go 1,690.00 ↓ CHART OF ACCOUNTS Fan-Tastic Sports Gear General Ledger ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable-Healthy Running 122 Accounts Receivable-The Locker Room 123 Accounts Receivable-CJ’s Sports 124 Accounts Receivable-Get Your Gear 125 Accounts Receivable-Four Seasons Sportswear 126 Accounts Receivable-Ready-2-Go 127 Accounts Receivable-Barb’s Best Gear 132 Notes Receivable-Fast Feet Co. 136 Interest Receivable 141 Merchandise Inventory 145 Office Supplies 151 Prepaid Insurance 181 Land 193 Office Equipment 194 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 211 Salaries Payable 213 Sales Tax Payable 214 Interest Payable 215 Notes Payable EQUITY 310 Rama Gupta, Capital 311 Rama Gupta, Drawing REVENUE 410 Sales 610 Interest Revenue EXPENSES 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 523 Delivery Expense 524 Repairs Expense 529 Selling Expenses 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense-Office Equipment 533 Insurance Expense 534 Office Supplies Expense 536 Credit Card Expense 537 Cash Short and Over 538 Bad Debt Expense 539 Miscellaneous Expense 710 Interest Expense -Finalize the journal entries shown on the Fan-Tastic Sports Gear panel and make any necessary changes. Refer to the Chart of Accounts for the exact wording of account titles. You may also use any items from the preceding list, if needed. - In the trial balance for March, you see that Notes Receivable-Fast Feet Co. has a negative balance of $165, which would seem to indicate that Fast Feet paid too much. Looking back through the journal entries for March, you find that on March 19 the accounting intern recorded receipt of $8,415 in payment of this note receivable. Further investigation reveals that on November 19, 20Y1, this note receivable was received from Fast Feet Co. for $8,250. You can find no additional information about this note in the accounting records. Assume a 360 day year. -Using the preceding information, compute the term and the interest rate of the note receivable from Fast Feet. 1. Term of the note: days 2. Interest rate of the note: % - Fan-Tastic Sports Gear recorded $3,000,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 80% of sales were on account, with over 400 customer accounts. Bad debt expense was $26,187. 1. Assume that Fan-Tastic Sports Gear used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,240. The company estimated uncollectible accounts expense using the percent of credit sales method and expected 0.85% of credit sales to be uncollectible. What is the amount of the adjusting entry to provide for doubtful accounts on December 31? Round all computations to the nearest dollar. 2. How much higher (lower) would Fan-Tastic Sports Gear’s net income have been under the allowance method assumption in (1) than under the direct write-off method? (Enter “0” if there is no change.) by 3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement?

Answer 1

Part 1: Correction of Journal entries:

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Jan. 17	Cash	110	9,600.00		↑
2		Bad Debt Expense	538		9,600.00			↑
3	17	Bad Debt Expense	538	9,600.00				↓
4		Accounts Receivable-CJ’s Sports Corp.	123		9,600.00	↓
5	21	Cash	110	10,700.00		↑
6		Bad Debt Expense	538	2,200.00				↓
7		Accounts Receivable-Four Seasons Sportswear Co.	125		12,900.00	↓
8	Feb. 15	Accounts Receivable-Healthy Running Inc.	121	3,000.00		↑
9		Bad Debt Expense	538	0
10		Sales	410		3,000.00			↑
11	Mar. 4	Cash	110	2,200.00		↑
12		Bad Debt Expense	538		2,200.00			↑
13	4	Cash	110	2,200.00		↑
14		Bad Debt Expense	538		2,200.00			↑
15	13	Cash	110	5,540.00		↑
16		Accounts Receivable-Barb’s Best Gear	127		5,540.00	↓
17	31	Bad Debt Expense	538	20,970.00				↓
18		Accounts Receivable-Healthy Running Inc.	121		5,150.00	↓
19		Accounts Receivable-The Locker Room	122		4,100.00	↓
20		Accounts Receivable-CJ’s Sports Corp.	123		2,780.00	↓
21		Accounts Receivable-Get Your Gear Inc.	124		7,050.00	↓
22		Accounts Receivable-Ready-2-Go	126		1,890.00	↓

Part 2:

Interest on notes receivables accrued till 31st Dec, 20X7
	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Dec. 31	Interest Receivable	136	47.25		↑
2		Interest Revenue	612		47.25			↑

Amount of interest accrued calculations:

Total interest amount = (4635-4500 ) = 135

Total period of note: 19-Nov 2017 to 19-Mar-2018, i.e. 120 days.

Rate of interest = 135/4500 = 3% for 120 days

Interest upto 31-Dec-2017, i.e. 42 days = 4500*(0.03*42/120) = 47.25

Part 3:

Receipt of payment agianst the note on 19th March, 20X8
	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Mar. 19	Cash		4635		↑
2		Interest Receivable			47.25	↓
3		Interest Revenue			87.75			↑
4		Notes Receivable-Fast Feet Co.	132		4500	↓

Interest revenue for the period from 1-Jan-2018 to 19-Mar-2018, i.e. 78 days = 4500*(0.03*78/120) = 87.75