Question

Data Recovery Services (DRS) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. DRS offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June.

June 10 Rashid’s hard drive crashes and he sends it to DRS.

June 12 After initial evaluation, DRS e-mails Rashid to let him know that full data recovery will cost $1,100.

June 13 Rashid informs DRS that he would like them to recover the data and that he is a student at UCLA, qualifying him for a 10% educational discount and reducing the cost by $110 ( = $1,100 × 10%)

. June 16 DRS performs the work and claims to be successful in recovering all data. DRS asks Rashid to pay within 30 days of today’s date, offering a 2% discount for payment within 10 days.

June 19 When Rashid receives the hard drive, he notices that DRS did not successfully recover all data. Approximately 30% of the data has not been recovered and he informs DRS.

June 20 DRS reduces the amount Rashid owes by 30%.

June 30 Rashid pays the amount owed.

1. Record the necessary transaction(s) for Data Recovery Services on each date. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2. Show how net revenues would be presented in the income statement.

Calculate net revenues if Rashid had paid his bill on June 25.

Answer 1

1. Journal Entries

June 10                 No Journal Entry Required

June 12                 No Journal Entry Required

June 13                 No Journal Entry Required

June 16 Dr           Data recovery charges receivable             $990

Cr            Data recovery charges income                                   $990

(Being service charges for data recovery accounted. 10% student discount given)

June 19                 No Journal Entry Required

                June 20 Dr           Data recovery charges income                   $297

                                                Data recovery charges receivable                             $297

                                                (Being 30% value reduced from invoice raised on June 16 against 30% data not recovered)

June 30 Dr           Bank/Cash                                                          $693

                Cr            Data recovery charges receivable                             $693

                                (Being amounts collected from Rashid net of 30% charged reduced)

2. Net revenue in the income statement would be $693

($1100-$110discount-$29730% adjustment)

If Rashid had paid his bills on June 25, he is eligible for a cash discount for payment within 10 days, amounting to 2%. This will be computed as $693*2%=$13.86

In this case the receivable would be $679.14 in the last entry, which should be passed on June 25.