In: Accounting
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Execusmart Consultants has provided business consulting services for several years. The company has been using the percentage of credit sales method to estimate bad debts but switched at the end of the first quarter this year to the aging of accounts receivable method. The company entered into the following partial list of transactions.
Number of Days Unpaid | ||||||||||||||||
Customer | Total | 0–30 | 31–60 | 61–90 | Over 90 | |||||||||||
Arrow Ergonomics | $ | 1,900 | $ | 800 | $ | 700 | $ | 400 | ||||||||
Asymmetry Architecture | 2,300 | $ | 2,300 | |||||||||||||
Others (not shown to save space) | 83,500 | 31,900 | 42,000 | 5,300 | 4,300 | |||||||||||
Weight Whittlers | 2,300 | 2,300 | ||||||||||||||
Total Accounts Receivable | $ | 90,000 | $ | 35,000 | $ | 42,700 | $ | 5,700 | $ | 6,600 | ||||||
Estimated Uncollectible (%) | 2 | % | 20 | % | 30 | % | 40 | % | ||||||||
Required:
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 Assets, Liabilities, or Stockholders Equity with a minus sign.)
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. Do not round intermediate calculations.)
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.
Sales Revenue and Service Revenue are two income statement accounts that relate to Accounts Receivable. Name two other accounts related to Accounts Receivable and Notes Receivable that would be reported on the income statement and indicate whether each would appear before, or after, Income from Operations.
1.
Event | Assets | = | Liabilities | + | Stockholder's Equity | |||
a | Accounts receivables | $2,30,000 | Service revenue | $2,30,000 | ||||
b | Allowance for doubtful accounts | -$2,300 | Bad debts expense | -$2,300 | ||||
c | Cash | $1,15,000 | ||||||
Accounts receivables | -$1,15,000 | |||||||
d | Allowance for doubtful accounts | $650 | ||||||
Accounts receivables | -$650 | |||||||
e | Accounts receivables | $1,80,000 | Service revenue | $1,80,000 | ||||
f | Allowance for doubtful accounts | -$1,800 | Bad debts expense | -$1,800 | ||||
g | Note receivables | $15,000 | ||||||
Cash | -$15,000 | |||||||
h | Accounts receivables | $650 | ||||||
Allowance for doubtful accounts | -$650 | |||||||
Cash | $650 | |||||||
Accounts receivables | -$650 | |||||||
i | Interest receivables ($15000*10%*1/12) | $125 | Interest revenue | $125 | ||||
j | Allowance for doubtful accounts ($13590-6600) | -$6,990 | Bad debts expense | -$6,990 |
Computation of allowance for estimated uncollectibles - Execusmart consultants | |||||
Customer | Total Balance | 0-30 days | 31-60 days | 61-90 days | Over 90 days |
Total Receivables | $90,000 | $35,000 | $42,700 | $5,700 | $6,600 |
Percentage uncollectibles | 2% | 20% | 30% | 40% | |
Allowance for doubtful accounts | $13,590 | $700 | $8,540 | $1,710 | $2,640 |
2.
Journal Entries | |||
Event | Particulars | Debit | Credit |
1 | Accounts receivables Dr | $2,30,000 | |
To Service revenue | $2,30,000 | ||
(To record services provided on credit) | |||
2 | Bad debts Expense Dr | $2,300 | |
To Allowance for doubtful accounts | $2,300 | ||
(To record bad debts expense) | |||
3 | Cash Dr | $1,15,000 | |
To Accounts receivables | $1,15,000 | ||
(To record collection of receivables) | |||
4 | Allowance for doubtful accounts Dr | $650 | |
To Accounts receivables | $650 | ||
(To write off receivables) | |||
5 | Accounts receivables Dr | $1,80,000 | |
To Service revenue | $1,80,000 | ||
(To record services provided on credit) | |||
6 | Bad debts Expense Dr | $1,800 | |
To Allowance for doubtful accounts | $1,800 | ||
(To record bad debts expense) | |||
7 | Notes receivables Dr | $15,000 | |
To Cash | $15,000 | ||
(Loan given to employee against note) | |||
8 | Accounts receivables Dr | $650 | |
To Allowance for doubtful accounts | $650 | ||
(To reinstate debtor account) | |||
9 | Cash Dr | $650 | |
To Accounts receivables | $650 | ||
(To record collection from customer previously written off) | |||
10 | Interest receivables Dr | $125 | |
To Interest revenue ($15,000*10%*1/12) | $125 | ||
(To record interest revenue) | |||
11 | Bad debts Expense Dr | $6,990 | |
To Allowance for doubtful accounts | $6,990 | ||
(To record bad debts expense) |
3.
Execusmart Consultants (Partial Balance Sheet) | ||
At March 31 | ||
Assets | Amount | |
Current Assets: | ||
Accounts receivables - Gross | $90,000.00 | |
Allowance for doubtful accounts | $13,590.00 | |
Accounts receivables, net of allowance | $76,410.00 | |
Note Receivables | $15,000.00 | |
Interest receivables | $125.00 |
4.
Execusmart Consultants would report: | ||
Bad debts expense | before | Income from operations |
Interest revenue | after | Income from operations |