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Question
Ch 5 Graded Assignment
Note: To receive partial credit on problems which require calculations, calculations must be shown.
Problem I: (22 points) Indicate whether each of the following statements is true (T) or false (F).
a. ___
The “Sales Discounts†and “Sales Returns and Allowances†accounts are both examples of
expense accounts.
b
.
The “Allowance for Doubtful Accounts†account is best described as a contra-liability.
___
c. ___
The amount shown on the balance sheet called “Net Accounts Receivable†is determined by
adding together the balances in the “Accounts Receivable†and “Allowance for Uncollectible
Accounts†accounts.
d. ___
“Net Accounts Receivable†can also be called net realizable value.
e. ___
The “Allowance Method†of accounting for bad debts requires companies to record an
estimate of bad debt expense arising from an uncollectible sale in the same year sales revenue
is recorded rather than in the year the bad debt expense is known with certainty.
f.
The “Allowance Method†of accounting for bad debts is an application of GAAP whereas the
“Direct Write-Off Method†is not.
___
g. ___
When a company’s receivables turnover ratio is decreasing from one year to the next, it
implies customers are paying off their accounts receivable more quickly than in the past.
h. ___
As a company’s receivables turnover ratio increases, the average collection period in terms
of days should be decreasing.
i.
___
Before the year-end journal entry to record bad debts, if the “Allowance for Doubtful
Accounts†account has a debit balance, the estimate of uncollectible accounts at the
beginning of the year was too low.
j.
___
The “aging†(or percentage-of-receivables) method may be described as a balance sheet
approach method because it provides a better estimate of uncollectible accounts and net
accounts receivable than the percentage of sales method.
k. ___
When preparing an aging report, most companies should expect that the longer a particular
customer’s account has been outstanding, the less likely it is to become uncollectible.
1
Problem II: (19 points) Green Inc. was incorporated on 4/1/X6 to provide landscaping services in the
Raleigh area. During April, the following transactions occurred with respect to services provided to its first
customer.
4/1/X6:
Green provided services worth $10,000 on account, terms 2/10, n/30.
4/7/X6:
Green granted the customer a $400 sales allowance.
4/9/X6:
Green’s customer paid off their account in full.
Required: Record the above three transactions in the general journal below.
Debit
Credit
4/1/X6
4/7/X6
4/9/X6
Accounting Check √ Since the customer has completely paid off its account receivable, is the “Account
Receivable†balance equal to zero? If your answer is not “yesâ€, please go back and check your calculations
and/or entries.
Problem III: (10 points) All else being equal, indicate how an increase in each of the following account
balances will affect the line descriptions on the income statement called “net sales revenue†and “net
incomeâ€.
Possible answers are increase, decrease, or no effect. The first line is completed as an example.
Effect on
Net Sales
Revenue
Ex
.
a.
b.
c.
d.
e.
Effect on
Net Income
As the “Depreciation Expense†account balance increases…
As the “Sales Revenue†account balance increases…
As the “Sales Discount†account balance increases…
As the “Sales Returns and Allowance†account balance
increases…
As the “Bad Debt Expense†account balance increases
As the “Interest Revenue†account balance increases
2
Problem IV: (22 points) On March 1, 20X6, Newton Corp. provided services worth $20,000 on account to
one of its longtime customers. At that time, Newton debited “Accounts Receivable†and credited “Service
Revenue†for $20,000. On April 1, 20X6, Newton agreed to convert the account receivable to a 12-month,
12%, note receivable. The customer will pay Newton $20,000 plus accrued interest on April 1, 20X7. Interest
on the note is compounded annually.
Note: Round all interest calculations to the nearest whole month.
A. How much total interest will Newton eventually earn on the Note Receivable?
Answer: $__
B. Assuming Newton has a calendar year-end, prepare in the general journal below the following three
journal entries:
The entry to record the conversion of the account receivable to a note receivable on April 1, 20X6
The entry to record accrued interest revenue on December 31, 20X6
The entry to record the collection of the note’s face value plus accrued interest on April 1, 20X7.
Date
4/1/X6
Debit
Credit
12/31/X
6
4/1/X7
C. Accounting Check √ Do your credits to the “Interest Revenue†account add up to the total interest
revenue amount from part “A� In addition, there should not be any receivable balances left after the last
entry since the note plus all of its related interest have been collected. Are your receivables balances
equal to zero? If your answer is not “yes†to both questions, please go back and check your calculations
and/or entries.
3
Problem V: (13 points) Ritter Inc.’s trial balance indicates the following select account balances at the end
of 20X1 before the year-end adjustment to record bad debts:
Ritter Inc.
Trial Balance (partial)
12/31/X1
Accounts Receivable
Allowance for Doubtful Accounts
Sales Revenue
Sales Discounts
Sales Returns and Allowances
Bad Debts Expense
Debit
$ 300,000
Credit
$ 2,000
2,000,000
60,000
40,000
0
A. What were Ritter’s net sales for 20X1?
Answer: $__
B. Assume at the end of 20X1, Ritter’s management estimates that 1% of net sales are uncollectible. Prepare
the 12/31/X1 journal entry to record bad debts for 20X1. $1,900,000 x 1% = $19,000
Date
12/31/X
1
Debit
Credit
C. Assuming Ritter has posted the above journal entry to its t-accounts, answer the following four questions:
What is the “Net Accounts Receivable†balance it will report on its 12/31/X1
balance sheet?
How much do customers owe Ritter at year-end?
Out of how much is owed, how much does the company expect to actually
collect?
What should be the “Bad Debt Expense†account balance it reports on its income
statement for 20X1?
4
Problem VI: (14 points) Summer Inc.’s trial balance indicates the following select account balances at the
end of 20X1 before the year-end adjustment to record bad debts:
Ritter Inc.
Trial Balance (partial)
12/31/X1
Accounts Receivable – 12/31/X1
Allowance for Doubtful Accounts (AFDA) – 12/31/X1
Sales Revenue
Bad Debts Expense – 1/1/X1
Debit
$ 500,000
Credit
$ 20,000
8,000,000
0
A. Assume at the end of 20X1, Summer’s management estimates that 5% of its ending Accounts Receivable
account balance will be uncollectible.
Required: Prepare the 12/31/X1 journal entry to record bad debts for 20X1.
Date
12/31/X1
Debit
Credit
B. Assume that on January 15th of the following year (20X2), Summers is notified that one of its customers
who owes money has filed for bankruptcy. As a consequence, $1,000 of the Accounts Receivable balanceis deemed to be uncollectible and will be specifically written off.
Required: Prepare the specific write-off journal entry to record this uncollectible account.
Date
1/15/X2
Debit
Credit
C. How should a specific write-off journal entry (see letter “B†above) affect a company’s net accounts
receivable balance? Circle or highlight one of the following:
Increase
Decrease
No effect
5
