Question

The Ski Factory provided the following information at December 31, year 1. Bank Reconciliation General ledger cash balance, 12/31/year 1 $ 35,132 Bank statement balance, 12/31/year 1 $ 32,612 Bank service charge (50 ) Deposits in transit 4,900 Returned customer checks marked NSF (750 ) Outstanding checks (2,712 ) Error in recording of office supplies 468 Adjusted cash balance,12/31/year 1 $ 34,800 Adjusted cash balance,12/31/year 1 $ 34,800

Marketable Securities:

The company invested $52,000 in a portfolio of marketable securities on December 22, year 1. The portfolio’s market value on December 31, year 1, had increased in value to $57,000.

Notes Receivable:

On November 1, year 1, The Ski Factory sold 250 pairs of skis to Arctic Lodge for $130,000. The lodge paid $10,000 at the point of sale and issued a one-year, $120,000, 5 percent note for the remaining balance. The note, plus accrued interest, is due in full on October 31, year 2. The Ski Factory adjusts for accrued interest revenue monthly.

Accounts Receivable:

The Ski Factory uses a balance sheet approach to account for uncollectible accounts expense. Outstanding accounts receivable on December 31, year 1, total $900,000. After aging these accounts, the company estimates that their net realizable value is $870,000. Prior to making any adjustment to record uncollectible accounts expense, The Ski Factory’s Allowance for Doubtful Accounts has a credit balance of $8,000.

Required:

a. Prepare the journal entry necessary to update the company’s accounts immediately after performing its bank reconciliation on December 31, year 1.

b. Prepare the journal entry necessary to adjust the company’s marketable securities to market value at December 31, year 1.

c. Prepare the journal entry necessary to accrue interest in December, year 1.

d. Prepare the journal entry necessary to report the company’s accounts receivable at their net realizable value at December 31, year 1.

Answer 1

Solution

Ski Factory

Journal entries:

Date	Account Titles and Explanation		Debit	Credit
a.	Miscellaneous Expenses		$50
	Accounts Receivable		$750
	Office Supplies			$468
	Cash			$332
	(To record bank charges, NSF check returned as accounts receivable and rectify erroneous entry of office supplies)
b.	Investment in securities		$5,000
	Gain on Investments			$5,000
(	(To record the increase in current market value of marketable securities, 57,000 - 52,000 = $5,000)
c.	Interest Receivable		$500
	Interest Revenue			$500
	(To recognize accrued monthly interest on Note Receivable, 120,000 x 5% x 1month/12months = $500)
d.	Uncollectible Accounts Expense		$22,000
	Allowance for Doubtful Debts			$22,000
	(To record for $30,000 (900,000 - 870,000) uncollectible accounts receivable, while adjusting the credit balance in the account, Allowance for Doubtful Debts, 30,000 - 8,000 = $22,000)