Question

CP8-4 Accounting for Accounts and Notes Receivable Transactions [LO 8-2, LO 8-3]

[The following information applies to the questions displayed below.]

Execusmart Consultants has provided business consulting 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 partial list of transactions.

  

a.	During January, the company provided services for $300,000 on credit.
b.	On January 31, the company estimated bad debts using 1 percent of credit sales.
c.	On February 4, the company collected $150,000 of accounts receivable.
d.	On February 15, the company wrote off a $650 account receivable.
e.	During February, the company provided services for $250,000 on credit.
f.	On February 28, the company estimated bad debts using 1 percent of credit sales.
g.	On March 1, the company loaned $11,000 to an employee, who signed a 12% note due in 3 months.
h.	On March 15, the company collected $650 on the account written off one month earlier.
i.	On March 31, the company accrued interest earned on the note.
j.	On March 31, the company adjusted for uncollectible accounts, based on the following aging analysis. Allowance for Doubtful Accounts has an unadjusted credit balance of $8,000.

				Number of Days Unpaid
Customer		Total		0–30			31–60			61–90			Over 90
Arrow Ergonomics	$	2,200		$	900		$	800		$	500
Asymmetry Architecture		3,000											$	3,000
Others (not shown to save space)		97,100			37,100			49,000			6,000			5,000
Weight Whittlers		3,000			3,000
Total Accounts Receivable	$	105,300		$	41,000		$	49,800		$	6,500		$	8,000
Estimated Uncollectible (%)					4	%		10	%		20	%		40	%

1.	For items (a)–(j), analyze the amount and direction (+ or –) of effects on specific financial statement accounts and the overall accounting equation. TIP: In item (j), you must first calculate the desired ending balance before adjusting the Allowance for Doubtful Accounts. (Do not round intermediate calculations. Enter any decreases to account balances with a minus sign.)

2.	Prepare the journal entries for items (a)–(j). (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

3.	Show how Accounts Receivable, Notes Receivable, and their related accounts would be reported in the current assets section of a classified balance sheet at the end of the quarter on March 31.

4.	Sales Revenue and Service Revenue are two income statement accounts that relate to Accounts Receivable. Name two other accounts related to Accounts Receivable and Note Receivable that would be reported on the income statement and indicate whether each would appear before, or after, Income from Operations for Execusmart Consultants.

    

Answer 1

1.

No.

Assets

=

Liabilities

+

Equity

Income Statement

Accounts Receivable

-

Allowance for Doubtful Accounts

+

Notes Receivable

+

Interest Receivable

+

Other Assets

=

+

Common Stock

Retained Earnings

Revenue

-

Expense

=

Net Income

a

300000

-

+

+

+

=

+

300000

300000

-

=

300000

b

-

3000

+

+

+

=

+

-3000

-

3000

=

-3000

c

-150000

-

+

+

+

150000

=

+

-

=

d

-650

-

-650

+

+

+

=

+

-

=

e

250000

-

+

+

+

=

+

250000

250000

-

=

250000

f

-

2500

+

+

+

=

+

-2500

-

2500

=

-2500

g

-

+

11000

+

+

-11000

=

+

-

=

h(1)

650

-

650

+

+

+

=

+

-

=

h(2)

-650

-

+

+

+

650

=

+

-

=

i

-

+

+

110

+

=

+

110

110

-

=

110

j

-

3120

+

+

+

=

+

-3120

-

3120

=

-3120

2.

No.	Account Titles and Explanation	Debit	Credit
a	Accounts receivable	300000
	Service revenue		300000
	(To record services provided on account)
b	Bad debt expense (1% x $300000)	3000
	Allowance for doubtful accounts		3000
	(To record bad debt expense)
c	Cash	150000
	Accounts receivable		150000
	(To record collections on account)
d	Allowance for doubtful accounts	650
	Accounts receivable		650
	(To record write-off of uncollectible accounts)
e	Accounts receivable	250000
	Service revenue		250000
	(To record services provided on account)
f	Bad debt expense (1% x $250000)	2500
	Allowance for doubtful accounts		2500
	(To record bad debt expense)
g	Notes receivable	11000
	Cash		11000
	(To record note received against employee loan)
h(1)	Accounts receivable	650
	Allowance for doubtful accounts		650
	(To re-instate account written-off)
h(2)	Cash	650
	Accounts receivable		650
	(To record collection)
i	Interest receivable	110
	Interest revenue ($11000 x 12% x 1/12)		110
	(To record interest accrued on note)
j	Bad debt expense ($11120 - $8000)	3120
	Allowance for doubtful accounts		3120
	(To record bad debt expense)

Balance in Allowance for doubtful accounts = ($41000 x 4%) + ($49800 x 10%) + ($6500 x 20%) + ($8000 x 40%) = 1640 + 4980 + 1300 + 3200 = $11120

3.

Execusmart Consultants
Balance Sheet (Partial)
March 31
Assets
Current Assets:
Accounts Receivable	105300
Less: Allowance for Doubtful Accounts	-11120	94180
Notes receivable		11000
Interest receivable		110

4. Sales returns and allowances: Before Income from Operations

Interest revenue: After Income from Operations