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Chapter 7: 4E (page 365)

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.

Short Answer

Expert verified

The actual balance of receivables is equal to $124,000.

Step by step solution

01

Definition of Cost of Goods Sold

Cost of goods sold is a line item determining the cost incurred for converting goods from raw material to finished goods that the company sells. It is reported in the income statement.

02

Determination of actual balance

Particular

Amount $

Merchandise purchased

$320,000

Less: Ending merchandise inventory

(90,000)

Cost of goods sold

230,000

Sales value (140% of $230,000)

322,000

Less: Collection from customers

(198,000)

Ending balance of receivables

$124,000

03

Difference

Particular

Amount $

Uncollected balance

$124,000

Less: Balance as per ledger

(82,000)

Apparent shortage

$42,000

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Most popular questions from this chapter

What is the accounts receivable turnover, and what type of information does it provide?

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.

3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of \)1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.

7. A bank overdraft of \)110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.

10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.鈥檚 balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

From inception of operations to December 31, 2017, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics. Bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner鈥檚 usual credit terms are net 30 days.

The balance in Allowance for Doubtful Accounts was \(130,000 at January 1, 2017. During 2017, credit sales totalled \)9,000,000, the provision for doubtful accounts was determined to be \(180,000, \)90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to \(15,000. Fortner installed a computer system in November 2017, and aging of accounts receivable was prepared for the first time as of December 31, 2017. A summary of the aging is as follows.

Classification by month of sale

Balance in each category

Estimated % uncollectible

November-December 2017

\)1,080,000

2%

July-October

650,000

10%

January-June

420,000

25%

Prior to 1/1/17

150,000

80%

\(2,300,000

Based on the review of collectibility of the account balances in the 鈥減rior to 1/1/17鈥� aging category, additional receivables totaling \)60,000 were written off as of December 31, 2017. The 80% uncollectible estimate applies to the remaining \(90,000 in the category. Effective with the year ended December 31, 2017, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Instructions

(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2017. Show supporting computations in good form. (Hint: In computing the 12/31/17 allowance, subtract the \)60,000 write-off.)

(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2017.

(Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date

Customer

Amount \(

March 31

E.L Masters Company

\)7,800

June 30

Stephen Crane Associates

6,700

September 30

Amy Lowell鈥檚 Dress Shop

7,000

December 31

R. Frost. Inc

9,830

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson鈥檚 sales are on a 30-day credit basis. Sales for the current year total \(2,200,000. The balance in Accounts Receivable at year-end is \)77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Instructions

(a) Do you agree or disagree with Dickinson鈥檚 policy concerning recognition of bad debt expense? Why or why not?

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?

Springsteen Inc. reported in a recent annual report 鈥淩estricted cash for debt redemption.鈥� What section of the balance sheet would report this item?
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