Felbin Inc. is in the second quarter of its first year ofoperations, and it plans to use the allowance method to account forits receivables. The CFO of the company is evaluating threedifferent approaches to the allowance method, and the impact thateach may have on the company's financial statements. The CFOestimates sales for the year will be $4.75 million, with $4.5million on credit. The tax rate for Felbin is 30%. The CFO asks youto prepare an analysis of what the year-end journal entries mightlook like under three different assumptions. Based on youranalysis, the CFO will determine which one of the three independentapproaches to take when recording bad debts expense atyear-end.
Assumption 1: Income Statement Approach
Felbin uses the income statement approach and estimates 2% ofcredit sales will be uncollectible. In the event economicconditions worsen during the year, the CFO would revise hisuncollectible percentage to 3%.
Assumption 2: Balance Sheet Approach
Felbin uses the balance sheet approach with estimateduncollectibles of 2% of ending receivables. This will result in anestimated charge to bad debt expense of $84,200. The uncollectiblepercentage would be increased to 2.5% if economic conditionsworsen.
Assumption 3: Aging Approach
As an alternative to the basic balance sheet approach, the CFO hasdrafted an estimated aging schedule (shown below). If economicconditions worsen, the CFO believes a one percentage point increasein the uncollectible percentages would be appropriate.
Days Outstanding
A/R Amount
Estimated Percent Uncollectible
Estimated $ Uncollectible
Percent if Economy Worsens
Less than 30 days
1,750,000
1%
17,500
2%
30â60 days
1,395,000
3%
41,850
4%
61â120 days
820,000
5%
41,000
6%
Greater than 120 days
245,000
20%
49,000
21%
Total
149,350
Using the CFO's estimate of sales and accounts receivable forthe year, prepare the following proposed journal entries for theCFO to review:
A.) Assuming the Income Statement approach is used and economicconditions do not worsen, prepare the journal entry that would bemade for the year.
B.) Assuming the Income Statement approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.
C.) Assuming the Balance Sheet approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.
D.) Assume the aging method is used. What is the expected chargeto bad debt expense under the assumption that economic conditionsworsen?
2) On January 1, 2016, Happy Tubs sold a hot tub to Monica,receiving a two-year, noninterest-bearing note in exchange for ahot tub that normally sells for $8,000. The note is for an amountthat achieves an effective interest rate of 10% per year.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare any adjusting entry necessary on December 31, 2016. 3.Prepare any adjusting entry necessary on December 31, 2017.
Felbin Inc. is in the second quarter of its first year ofoperations, and it plans to use the allowance method to account forits receivables. The CFO of the company is evaluating threedifferent approaches to the allowance method, and the impact thateach may have on the company's financial statements. The CFOestimates sales for the year will be $4.75 million, with $4.5million on credit. The tax rate for Felbin is 30%. The CFO asks youto prepare an analysis of what the year-end journal entries mightlook like under three different assumptions. Based on youranalysis, the CFO will determine which one of the three independentapproaches to take when recording bad debts expense atyear-end.
Assumption 1: Income Statement Approach
Felbin uses the income statement approach and estimates 2% ofcredit sales will be uncollectible. In the event economicconditions worsen during the year, the CFO would revise hisuncollectible percentage to 3%.
Assumption 2: Balance Sheet Approach
Felbin uses the balance sheet approach with estimateduncollectibles of 2% of ending receivables. This will result in anestimated charge to bad debt expense of $84,200. The uncollectiblepercentage would be increased to 2.5% if economic conditionsworsen.
Assumption 3: Aging Approach
As an alternative to the basic balance sheet approach, the CFO hasdrafted an estimated aging schedule (shown below). If economicconditions worsen, the CFO believes a one percentage point increasein the uncollectible percentages would be appropriate.
Days Outstanding | A/R Amount | Estimated Percent Uncollectible | Estimated $ Uncollectible | Percent if Economy Worsens |
Less than 30 days | 1,750,000 | 1% | 17,500 | 2% |
30â60 days | 1,395,000 | 3% | 41,850 | 4% |
61â120 days | 820,000 | 5% | 41,000 | 6% |
Greater than 120 days | 245,000 | 20% | 49,000 | 21% |
Total | 149,350 |
Using the CFO's estimate of sales and accounts receivable forthe year, prepare the following proposed journal entries for theCFO to review:
A.) Assuming the Income Statement approach is used and economicconditions do not worsen, prepare the journal entry that would bemade for the year.
B.) Assuming the Income Statement approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.
C.) Assuming the Balance Sheet approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.
D.) Assume the aging method is used. What is the expected chargeto bad debt expense under the assumption that economic conditionsworsen?
2) On January 1, 2016, Happy Tubs sold a hot tub to Monica,receiving a two-year, noninterest-bearing note in exchange for ahot tub that normally sells for $8,000. The note is for an amountthat achieves an effective interest rate of 10% per year.
Required:
1. Prepare the journal entry to record the sale.
2. Prepare any adjusting entry necessary on December 31, 2016. 3.Prepare any adjusting entry necessary on December 31, 2017.
Related questions
Prepare the Income Statement, Statement of Ownersâ Equity and the Balance Sheet for the fiscal year ending September 30, 2017. To support your work prepare the appropriate journal entries and post to the related Accounting Equation or âT-accounts".
The attached Balance Sheet gives your firm's position at the end of fiscal 2016. During fiscal 2017, your firm has the following transactions:
Your firm has total sales for the year of $1,210,500. Included in the total sales figure are $1,010,500 sales on credit. During the year, the firm received $792,000 of payments on account. Customers returned $7,800 for cash refunds during the year.
During the year, the firm determined that accounts totaling $2,900 were uncollectible. Moreover, a $375 receivable written off during the year was subsequently collected. The $375 is not included in âA.â above.
Your firm uses the allowance method to record bad debts. Specifically, the firm uses the percentage of receivables method to compute the allowance for doubtful accounts. The firm uses the following information to determine the allowance:
| Age of Receivables | Percent of current balance | Percent expected uncollectible |
| <30 days | 70% | 2% |
| < 60 days | 23% | 10% |
| >60 days | 7% | 50% |
| Your Firm | |||
| Balance Sheet | |||
| September 30, 2016 | |||
| Assets | |||
| Cash | $ 102,530 | ||
| Accounts receivable | $ 101,640 | ||
| Allowance for doubtful accounts | (6,160) | ||
| Accounts receivable, net | 95,480 | ||
| Inventories | 136,400 | ||
| Trading securities | 111,100 | ||
| Prepaid insurance | 17,100 | ||
| Total Current Assets | 462,610 | ||
| Property, Plant and Equipment, gross | $ 1,633,500 | ||
| Accumulated depreciation | (546,975) | ||
| Property, Plant and Equipment, net | 1,086,525 | ||
| Total Assets | $ 1,549,135 | ||
| Liabilities and Shareholders' Equity | |||
| Accounts payable | $ 89,645 | ||
| Salaries payable | 31,575 | ||
| Dividends payable | 4,400 | ||
| Total Current Liabilities | 125,620 | ||
| Long-term note payable | 380,000 | ||
| Total Liabilities | 505,620 | ||
| Common stock, no par | 490,000 | ||
| Retained Earnings | 591,215 | ||
| Accumulated Other Comprehensive Income | 4,300 | ||
| Treasury stock | (42,000) | ||
| Total Shareholder's Equity | 1,043,515 | ||
| Total Liabilities and Shareholder's Equity | $ 1,549,135 | ||
Question 14 pts
The five components to a system of internal controls include all of the following except:
| control procedure |
| risk assessment |
| safeguarding assets |
| monitoring controls |
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Question 24 pts
An automobile company testing brakes on new vehicles is part of:
| control procedure |
| risk assessment |
| information systems |
| monitoring controls |
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Question 34 pts
Which account would we debit to open a new petty cash fund?
| cash |
| petty cash |
| miscellaneous expense |
| petty cash expense |
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Question 44 pts
Our company established a petty cash fund with a balance of $200. We have petty cash receipts for travel expenses that total $125. We have counted petty cash and found that we were $2 short. Which of the following would be included in the entry to replenish the fund?
| a credit to petty cash for $127 |
| a debit to travel expenses for $125 |
| a credit to cash over and short for $2 |
| a credit to cash for $125 |
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Question 54 pts
On a bank reconciliation, which of the following will not appear as a deduction on a bank statement?
| deposit |
| NSF check (non-sufficient funds) |
| service charge |
| Payments made by EFT (electronic fund transfer) |
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Question 64 pts
Our company received a bank statement with a balance of $10,000. The reconciling items include outstanding checks that totaled $2,000 and a deposit in transit of $1,000. What is the adjusted bank balance after we complete the bank reconciliation?
| $7,000 |
| $9,000 |
| $11,000 |
| $13,000 |
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Question 74 pts
Our company has decided to write off an uncollectible account of $3,000. What account would we credit to record bad debt expense if our company uses the direct write-off method for bad debts?
| bad debt expense |
| accounts receivable |
| allowance for doubtful accounts |
| cash |
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Question 84 pts
Where does allowance for doubtful accounts appear on our financial statements?
| on balance sheet as a current liability |
| on income statement as part of cost of goods sold |
| on balance sheet as a contra asset related to accounts receivable |
| on the statement of retained earnings as a deduction from net income |
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Question 94 pts
At the end of 2018, we have a credit balance of $10,000 in allowance for doubtful accounts before the adjusting entry for bad debts expense. The company uses the percentage of sales method to estimate bad debt expense. The company estimates that 3% of net credit sales will be uncollectible for the year. Net credit sales for the year amounted to $1,000,000. What account and amount would we debit to record the adjusting entry for bad debt expense?
| bad debt expense, $30,000 |
| allowance for doubtful accounts, $30,000 |
| bad debt expense, $20,000 |
| accounts receivable, $20,000 |
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Question 104 pts
On July 1, 2017, our company accepts a 9-month 5% note for $12,000. What account and amount would we debit when we record the year-end adjusting entry on December 31, 2017?
| interest revenue, $300 |
| interest revenue, $350 |
| interest receivable, $300 |
| interest receivable, $350 |
Open the following selected accounts recording the opening balances as of January 1 of the current year.
| 114.1 | Allowance for doubtful accounts | 12,200 Credit |
| 313 | Income summary | |
| 718 | Bad debts expense |
3.Record the following transactions in general journal form in the Group Project Excel Spreadsheet Problem 2 Parts 2 - 6 tab.
4.Post these transactions to the three selected accounts above and to Accounts receivable.
5.Enter the ending balances in the three accounts above and enter the ending balance in the Accounts Receivable account.
| Apr 1, 09 | Accepted a $20,000, one - year, 8% note dated April 1 from Bruce Hanson for the sale of inventory; Cost of Goods Sold was $16,500. |
| June 27 | Wrote off the $2,375 balance owed by Miller Corp., which has no assets. |
| Oct. 5 | Received 25% of the $12,000 balance owed by F.M. Knox Co., a bankrupt, and wrote off the remainder as uncollectible. |
| Dec. 31 | Based on an analysis of the $257,724 of accounts receivable, it was estimated that $14,500 will be uncollectible. Record the adjusting entry using the Aging method. |
| Dec. 31 | Record the adjusting entry for interest accrued on the Bruce Hanson note |
| Dec. 31 | Record the entries to close the appropriate accounts into Retained Earnings. |
| April 1, 10 | Collected the maturity value on the Hanson note. |
6.Determine the net accounts receivable (the amount Summer expects to collect as of December 31.
7.Compute the accounts receivable turnover and the dayâs sales in receivables for the year. Assume that there were $1,800,000 sales account.
8.How is Summer Company doing with collection of their accounts receivable compared to the industry? Assume the industry average for the accounts receivable turnover is 11 and the industry average for the dayâs sales in receivables is 37 days?
