ACC363 Week 1 Solutions

EXERCISE 9-2

The ledger of Elburn Company at the end of the current year shows Accounts Receivable $110,000, Sales $840,000, and Sales Returns and Allowances $28,000.

Instructions

(a) If Elburn uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Elburn determines that Copp’s $1,400 balance is uncollectible.

(b) If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.

(c) If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

On January 1, 2006, Solomon Company purchased the following two machines for use in its production process.

Machine A: The cash price of this machine was $38,500. Related expenditures included:  sales tax $2,200, shipping costs $175, insurance during shipping $75, installation and testing costs $50, and $90 of oil and lubricants to be used with the machinery during its first year of operation. Solomon estimates that the useful

life of the machine is 4 years with a $5,000 salvage value remaining at the end of that time period.

Machine B: The recorded cost of this machine was $100,000. Solomon estimates that the useful life of the machine is 4 years with a $8,000 salvage value remaining at the end of that time period.

Instructions

(a) Prepare the following for Machine A.

(1) The journal entry to record its purchase on January 1, 2006.

(2) The journal entry to record annual depreciation at December 31, 2006, assuming the straight-line method of depreciation is used.

(b) Calculate the amount of depreciation expense that Solomon should record for machine B each year of its useful life under the following assumption.

(1) Solomon uses the straight-line method of depreciation.

(2) Solomon uses the declining-balance method. The rate used is twice the straight-line rate.

(3) Solomon uses the units-of-activity method and estimates the useful life of the machine is 25,000 units. Actual usage is as follows: 2006, 6,500 units; 2007, 7,500 units; 2008, 6,000 units; 2009, 5,000 units.

(c) Which method used to calculate depreciation on machine B reports the lowest amount of depreciation expense in year 1 (2006)?

The lowest amount in year 4 (2009)?

The lowest total amount over the 4-year period?