Question

1. The Hawkeye Limos reported the following information related to limousine rentals for 2017 and 2018:

						2018	2017
Limo rental revenue						$ 150,000	$    175,000
Bad debt expense						?	$            900
Accounts receivable						$    34,375	$      15,600
Allowance for doubtful accounts						?	$                  -
Unearned rent revenue						$      4,500	$         6,500
Write offs						$        400	$           900
Aging of Accounts receivable at 12/31.
Not yet due						$    13,395	$      15,600
From 1 to 30 days past due						4,500
From 31 to 60 days past due						3,400
Over 60 days past due						13,080
						$    34,375	$      15,600

1. Prepare the journal entries to record the following selected transactions from December 2018:
   1. Received an advance payment of $500 for a Valentine’s Day rental.
2. 2. Received $750 for a New Year’s Eve rental.
3. 3. Wrote off a $400 receivable from a Halloween rental.
4. Assuming all rentals are on credit, calculate the following:
   1. The accounts receivable turnover ratio for 2017. Accounts receivable totaled $14,000 at 12/31/16.
5. 2. Days credit sales outstanding at 12/31/17.
6. Hawkeye estimates collection rates on accounts receivable will be 100% for accounts not yet due, 98% for accounts between 1 and 30 days past due, 95% for accounts between 31 and 60 days past due, and 75% for accounts more than 60 days past due.
   1. Calculate the allowance for doubtful accounts at 12/31/18, and 2018 bad debt expense using the percentage of credit sales method. Assume all sales are credit sales.
7. 2. Calculate the allowance for doubtful accounts at 12/31/18, and 2018 bad debt expense using the aging of accounts receivable method.
8. 3. Which set of estimate is preferable? Explain why. Your answer should be specific to Hawkeye’s situation.
9. 4. Calculate cash collected from customers assuming Hawkeye uses the aging method to calculate bad debt expense.
10. 5. Show what would have been be reported under operating cash flows using the indirect method for 2018. Assume Hawkeye chose the percentage of sales method to estimate bad debts.

Answer 1

Requirement a: Prepare the following journal entry for advanced rent

Date	Account Title and Explanation	Debit	Credit
Dec	Cash	$500
	Unearned Rent Revenue		$500
	To record unearned rent revenue

Requirement b: Prepare the following journal entry for advanced rent

Dec	Cash	$750
	Unearned Rent Revenue		$750
	To record unearned rent revenue

  Requirement c: Prepare the following journal entry for uncollectible accounts written off

Dec	Allowance for doubtful accounts	$400
	Accounts receivable		$400
	To write off uncollectible accounts

Requirement a: Compute accounts receivable turnover ratio as follows

Accounts receivable turnover ratio     = Net credit sales ÷ Average accounts receivable

                                                            = $175,000 ÷ (($15,600 + $14,000) ÷ 2)

                                                            = 11.82 times

Requirement b: Compute days credit sales outstanding as follows

Days credit sales outstanding             = (Accounts receivable ÷ Net credit sales) × 365 days

                                                            = ($15,600 ÷ $175,000) × 365

                                                            = 32.54 days