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Chapter 8: Q25E (page 473)

Professional Steam Cleaning performs services on account. When a customer account becomes four months old, Professional converts the account to a note receivable. During 2018, the company completed the following transactions:

2018

Apr.28

Performed service on account for Parkview Club, \(18,000.

Sep. 1

Received an \)18,000, 60-day, 12% note from Parkview Club in satisfaction of its past-due account receivable.

Oct. 31

Collected the Parkview Club note at maturity

Record the transactions in Professional’s journal. Round to the nearest dollar.

Short Answer

Expert verified

Journal entries are recorded in step 2.

Step by step solution

01

Calculation of interest amount

Interest amount is calculated as follows:


InterestAmount=Notesreceivable×Interestrate×FractionofYear=$18,000×12%×60365=$355

02

Journal entries

Date

Account and explanation

Debit

Credit

Apr.28

Accounts Receivable - Parkview club

$ 18,000

Service Revenue

$ 18,000

(To record services revenue earned)

Sept 1

Notes Receivable - Parkview club

$ 18,000

Accounts Receivable - Parkview club

$ 18,000

(To record note issued against accounts receivable)

Oct.31

Cash

$18,355

Notes Receivable- Parkview club

$18,000

Interest Revenue

$355

(To record collection of note with interest)

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Most popular questions from this chapter

When is bad debts expense recorded when using the allowance method?

Weddings on Demand sells on account and manages its own receivables. My average

experience for the past three years has been as follows:

Sales \( 350,000

Cost of Goods Sold 210,000

Bad Debts Expense 4,000

Other Expenses 61,000

Unhappy with the amount of bad debts expense she has been experiencing, Aledia

Sanchez, controller, is considering a major change in the business. Her plan would be

to stop selling on account altogether but accept either cash, credit cards, or debit cards

from her customers. Her market research indicates that if she does so, her sales will

increase by 10% (i.e., from \)350,000 to \(385,000), of which \)200,000 will be credit

or debit card sales and the rest will be cash sales. With a 10% increase in sales, there

will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will

no longer have bad debts expense, but she will have to pay a fee on debit/credit card

transactions of 2% of applicable sales. She also believes this plan will allow her to save

$5,000 per year in other operating expenses.

Should Sanchez start accepting credit cards and debit cards? Show the

computations of net income under her present arrangement and under the plan.

The comparative financial statements of Newton Cosmetic Supply for 2018, 2017,

and 2016 include the data shown here:

2018 2017 2016

Balance sheet—partial

Current Assets:

Cash \( 80,000 \) 50,000 $ 30,000

Short-term investment 150,000 170,000 125,000

Accounts Receivable, Net 310,000 260,000 220,000

Merchandise Inventory 360,000 335,000 330,000

Prepaid Expenses 50,000 30,000 35,000

Total Current Assets 950,000 845,000 740,000

Total Current Liabilities 530,000 630,000 670,000

Income statement—partial

Net Sales (all on account) 5,850,000 5,110,000 425,000

Requirements

1. Compute these ratios for 2018 and 2017:

a. Acid-test ratio (Round to two decimals.)

b. Accounts receivable turnover (Round to two decimals.)

c. Days’ sales in receivables (Round to the nearest whole day.)

2. Considering each ratio individually, which ratios improved from 2017 to 2018 and

which ratios deteriorated? Is the trend favorable or unfavorable for the company?

Accounting for uncollectible accounts using the allowance method

This problem continues the Canyon Canoe Company situation from Chapter 7.

Canyon Canoe Company has experienced rapid growth in its first few months of operations and has had a significant increase in customers renting canoes and purchasing T-shirts. Many of these customers are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have decided it is time to review their business transactions and update some of their business practices. Their first step is to make decisions about handling accounts receivable.

So far, year-to-date credit sales have been \(15,500. A review of outstanding

receivables resulted in the following aging schedule:


Age of Accounts as of June 30, 2019

Customer name

1-30 days

31-60 days

61-90 days

Over 90 days

Total balance

Canyon

\)250

\(250

Crazy trees

\)200

\(150

\)350

Early start Daycare

\(500

Lakefront Pavilion

\)575

\(500

\)575

Outdoor Center

\(300

\)300

Rivers Canoe Club

\(350

\)350

Sport Shirts

\(450

\)120

\(570

Zack’s Marina

\)75

\(75

\)225

Totals

\(1,900

\)345

\(375

\)500

$3,120

Requirements

1. The company wants to use the allowance method to estimate bad debts. Determine the estimated bad debts expense under the following methods at June 30, 2019. Assume a zero-beginning balance for Allowance for Bad Debts. Round to the nearest dollar.

a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.

b. Percent-of-receivables method, assuming 22.5% of receivables will not be

collected.

c. Aging-of-receivables method, assuming 5% of invoices 1–30 days will not be

collected, 20% of invoices 31–60 days, 40% of invoices 61–90 days, and 75% of

invoices over 90 days.

2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales method.

3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.

4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts. Assume a zero beginning balance for Allowance for Bad Debts.

5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on June 30, 2019.

Delta Watches completed the following selected transactions during 2018

and 2019:2018

Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of

\(450,000 and recorded that amount as expense. The company uses the

allowance method.

31 Made the closing entry for bad debts expense.

2019

Jan. 17 Sold merchandise inventory to Mack Smith, \)400, on account. Ignore Cost of

Goods Sold.

Jun. 29 Wrote off Mack Smith’s account as uncollectible after repeated efforts to

collect from him.

Aug. 6 Received \(400 from Mack Smith, along with a letter apologizing for being so

late. Reinstated Smith’s account in full and recorded the cash receipt.

Dec. 31 Made a compound entry to write off the following accounts as uncollectible:

Cam Carter, \)1,400; Mike Venture, \(1,200; and Russell Reeves, \)400.

31 Estimated that bad debts expense for the year was 2% on credit sales of

\(510,000 and recorded the expense.

31 Made the closing entry for bad debts expense.

Requirements

1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming

the accounts begin with a zero balance. Record the transactions in the general journal

(omit explanations), and post to the two T-accounts.

2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000.

Show how net accounts receivable would be reported on the balance sheet at

that date.
See all solutions

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