Question

Chapter 8 MP08-01

You have just been hired as the accountant for Fan-Tastic Sports Gear Inc., a wholesaler of sporting goods and apparel. The previous accountant left abruptly in late December, 20Y7, and an accounting intern has been drafting the journal entries since January. You are examining the accounting records before finalizing the journal entries for the first quarter of 20Y8. The following journal shows some of the accounts receivable transactions that you are reviewing.

PAGE 11

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Jan. 17	Sales		9,600.00				↓
2		Bad Debt Expense			9,600.00			↑
3	17	Bad Debt Expense		9,600.00				↓
4		Accounts Receivable-CJ’s Sports Corp.			9,600.00	↓
5	21	Cash		10,700.00		↑
6		Bad Debt Expense		2,200.00				↓
7		Accounts Receivable-Four Seasons Sportswear Co.			12,900.00	↓
8	Feb. 15	Accounts Receivable-Healthy Running Inc.		3,000.00		↑
9		Bad Debt Expense		500.00				↓
10		Sales			3,500.00			↑
11	Mar. 4	Accounts Receivable-Four Seasons Sportswear Co.		2,200.00		↑
12		Bad Debt Expense			2,200.00			↑
13	4	Cash		2,200.00		↑
14		Bad Debt Expense			2,200.00			↑
15	13	Cash		5,540.00		↑
16		Accounts Receivable-Barb’s Best Gear			5,540.00	↓
17	31	Bad Debt Expense		20,970.00				↓
18		Accounts Receivable-Healthy Running Inc.			5,150.00	↓
19		Accounts Receivable-The Locker Room			4,100.00	↓
20		Accounts Receivable-CJ’s Sports Corp.			2,780.00	↓
21		Accounts Receivable-Get Your Gear Inc.			7,050.00	↓
22		Accounts Receivable-Ready-2-Go			1,890.00	↓

CHART OF ACCOUNTS
Fan-Tastic Sports Gear Inc.
General Ledger
ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable-Healthy Running Inc. 122 Accounts Receivable-The Locker Room 123 Accounts Receivable-CJ’s Sports Corp. 124 Accounts Receivable-Get Your Gear Inc. 125 Accounts Receivable-Four Seasons Sportswear Co. 126 Accounts Receivable-Ready-2-Go 127 Accounts Receivable-Barb’s Best Gear 132 Notes Receivable-Fast Feet Co. 136 Interest Receivable 141 Inventory 145 Office Supplies 151 Prepaid Insurance 181 Land 191 Store Equipment 192 Accumulated Depreciation-Store Equipment 193 Office Equipment 194 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 211 Salaries Payable 212 Unearned Rent 213 Customer Refunds Payable 215 Notes Payable EQUITY 310 Common Stock 311 Retained Earnings 312 Dividends 313 Income Summary In the trial balance for March, you see that Notes Receivable-Fast Feet Co. has a negative balance of $135, which would seem to indicate that Fast Feet paid too much. Looking back through the journal entries for March, you find that on March 19 the accounting intern recorded receipt of $4,635 in payment of this note receivable. Further investigation reveals that on November 19, 20Y7, this note receivable was received from Fast Feet Co. for $4,500. You can find no additional information about this note in the accounting records. Assume a 360 day year. Using the preceding information, compute the term and the interest rate of the note receivable from Fast Feet. 1. Term of the note: days Points: 0 / 1 2. Interest rate of the note: % Points: 0 / 1 3. Journalize the entry needed to record information about the note receivable from Fast Feet for the year 20Y7. Assume that the entry on November 19, 20Y7 is correct. Refer to the Chart of Accounts of exact wording of account titles. Round all amounts to the nearest dollar. Question not attempted. PAGE 11 JOURNAL ACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 2 4. Journalize the entry needed to record collection of the note at maturity on March 19, 20Y8. Assume that the entry on November 19, 20Y7 is correct. Refer to the Chart of Accounts of exact wording of account titles. Round all amounts to the nearest dollar. Question not attempted. PAGE 3 JOURNAL ACCOUNTING EQUATION Score: 0/49 DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 2 3 4 Fan-Tastic Sports Gear Inc. recorded $3,000,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 80% of sales were on account, with over 300 customer accounts. Bad debt expense was $26,187. 1. Assume that Fan-Tastic Sports Gear Inc. used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,190. The company estimated uncollectible accounts expense using the percent of credit sales method and expected 0.85% of credit sales to be uncollectible. What is the amount of the adjusting entry to provide for doubtful accounts on December 31? Round all computations to the nearest dollar. $_______________ 2. How much higher (lower) would Fan-Tastic Sports Gear Inc.’s net income have been under the allowance method assumption previously shown in (1) than under the direct write-off method? (Enter “0” if there is no change.) Higher by $_________________ 3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement? Balance sheet	REVENUE 410 Sales 610 Rent Revenue 612 Interest Revenue EXPENSES 510 Cost of Goods Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense-Store Equipment 523 Delivery Expense 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense-Office Equipment 533 Insurance Expense 534 Office Supplies Expense 536 Credit Card Expense 537 Cash Short and Over 538 Bad Debt Expense 539 Misc. Administrative Expense 710 Interest Expense

Answer 1

Part 1:

	Received on
Note receivable - Fast feet received on	19-Nov-17
Amount received from Fast Feet to discharge the Notes on	19.03.2018
Term of note	121 days
Part 2:
Interest rate of note
Amount of interest
Amount received from Fast Feet for the Notes	4635
Less: Amount of notes receivable	4500
	135
Term of note	121 days
Thus, annual interest would have been	401.652893
Hence, the interest rate of the note (%)	8.93

Part 3:

	Date	Description	Post Ref.	Debit	Credit	Assets	Liabilities	Equity
1	19.11.2017	Notes receivable		4500		4500
		Sales			4500			4500
		(Being notes receivable from Fast Feet)
Part 4:
	Date	Description	Post Ref.	Debit	Credit	Assets	Liabilities	Equity
1	19.03.2018	Bank		4635		4635
		Notes receivable			4500	-4500
		Interest			135			135
		(Being the cash received against the Notes)
		Interest		135
		Profit and loss account			135
		(Being then interest credited to profit and loss account)