Question

Web Wizard, Inc., has provided information technology services for several years. For the first two months of the current year, the company has used the percentage of credit sales method to estimate bad debts. At the end of the first quarter, the company switched to the aging of accounts receivable method. The company entered into the following partial list of transactions during the first quarter.

1. During January, the company provided services for $40,000 on credit.
2. On January 31, the company estimated bad debts using 1 percent of credit sales.
3. On February 4, the company collected $20,000 of accounts receivable.
4. On February 15, the company wrote off a $100 account receivable.
5. During February, the company provided services for $30,000 on credit.
6. On February 28, the company estimated bad debts using 1 percent of credit sales.
7. On March 1, the company loaned $2,400 to an employee, who signed a 6% note, due in 6 months.
8. On March 15, the company collected $100 on the account written off one month earlier.
9. On March 31, the company accrued interest earned on the note.
10. On March 31, the company adjusted for uncollectible accounts, based on an aging analysis (below). Allowance for Doubtful Accounts has an unadjusted credit balance of $1,200.

					Number of Days Unpaid
Customer		Total		0–30			31–60			61–90			Over 90
Alabama Tourism	$	200		$	100		$	80		$	20
Bayside Bungalows		400											$	400
Others (not shown to save space)		17,000			6,800			8,400			1,000			800
Xciting Xcursions		400			400
Total Accounts Receivable	$	18,000		$	7,300		$	8,480		$	1,020		$	1,200
Estimated Uncollectible (%)					2	%		10	%		20	%		40	%

Required:

1. For items (a)–(j), analyze the transaction to determine effects on specific financial statement accounts and the overall accounting equation. (Enter any decreases to Assets, Liabilities, or Stockholders Equity with a minus sign. Do not round intermediate calculations.)

Answer 1

Solution:

Event	Assets		=	Liabilities		+	Stockholder's Equity
a	Accounts receivables	$40,000.00					Service revenue	$40,000.00
b	Allowance for doubtful accounts	-$400.00					Bad debts expense	-$400.00
c	Cash	$20,000.00
	Accounts receivables	-$20,000.00
d	Allowance for doubtful accounts	$100.00
	Accounts receivables	-$100.00
e	Accounts receivables	$30,000.00					Service revenue	$30,000.00
f	Allowance for doubtful accounts	-$300.00					Bad debts expense	-$300.00
g	Note receivables	$2,400.00
	Cash	-$2,400.00
h	Accounts receivables	$100.00
	Allowance for doubtful accounts	-$100.00
	Cash	$100.00
	Accounts receivables	-$100.00
i	Interest receivables (2200*6%*1/12)	$12.00					Interest revenue	$12.00
j	Allowance for doubtful accounts (1678-1200)	-$478.00					Bad debts expense	-$478.00

Computation of allowance for estimated uncollectibles - Web Wizard Inc.
Customer	Balance	0-30 days	31-60 days	61-90 days	Over 90 days
Total Receivables	$18,000	$7,300	$8,480	$1,020	$1,200
Percentage uncollectibles		2%	10%	20%	40%
Allowance for doubtful accounts	$1,678	$146	$848	$204	$480