accounting

Exercise VII

VII.A. Accounting Cycle

The Accounting Cycle – Problem Set ABC Company Ltd.

Balance Sheet on Nov. 30, 2014
Assets		Equities
Equipment	2 000	Paid-in Capital	11 000
Land	5 500	Retained Earnings	1 000
Office Supplies Inventory	1 200	Loan Payable	2 000
Accounts Receivable	7 400	Tax payables	900
Cash, Bank	3 000	Accounts payable	3 200
Prepaid expenses	3 000	Unearned rent revenue	4 000
		Allowance for uncollectible Accounts	3 000
Total assets	22 100	Total equities	22 100

Summary of transactions during December:

1. Cash-Purchase of € 1 800 of Office Supplies Inventory

2. Performed consulting services, for which we received € 9,100 cash immediately.

3. Received an invoice for a series of advertisements, € 1 200, that appeared in the local news during December and will be paid in January.

4. In November 2014 we performed additional consulting work, € 2 000 on credit (5/30, n 90) and in December the customer used the discount for prompt payment..

5. Performed advertisement services for Customer XYZ, for which we will receive € 1,000 on 2 month credit sale.

6. Paid salaries to employees of € 1 200 for December.

7. We sold some of the redundant office supplies inventory on the market –€ 500 through credit card transaction (a straight 3% of credit card services were taken).

8. Received an invoice for external services of € 1 400 for December to be paid with 60 credit term

9. Paid outstanding tax payables.

10. Paid trade creditors € 1,300.

11. The cost of office supplies used during December is € 1,100.

12. In the beginning of September 2014 a subscription rights for local newspaper magazine of € 6 000 was paid for half-a year term in advance;

13. In the beginning of October 2014 company receives rent for 6 months in advance, €6,000

14. At the end of the month Company repaid to the Bank credit tranche 500 and paid interest charges (interest rate as of 9 % p.a.)

15. At the end of month the Customer XYZ made a claim on the advertisement services and we agreed to sales allowance (a reduction of the original selling price) in the amount of 20%.

16. Depreciation of equipment for December amounts to € 100.

17. ABC company acknowledged the $2,000 worth of bad debts in December 2014.

Required:

a) Prepare the opening journal entry on Dec. 1, 2014.

b) Prepare the journal entries for the transactions (1. – 17) for the month of December and post them to the T-accounts, opening additional T-accounts for accounts as needed. Cross-reference the entries using the numbers of the transactions above.

c) Prepare a trial balance.

d) Prepare the adjusting journal entries and record them at the end of December in the T-accounts as well as in the trial balance.

e) Prepare the closing entries for the temporary accounts and the Income Statement.

f) Prepare the closing entries for the permanent accounts and the Balance Sheet as of Dec. 31, 2014.

VII.B. Account Receivables valuation

Thomson Corp. had sales of € 100,000 during 2015, including € 60,000 on credit. Balances on Dec. 31, 2014, were Accounts Receivable, € 9,000, and Allowance for Bad Debts, € 800 (= credit balance). Data for 2015: collections on accounts receivable were € 56,000. Bad debts expense was estimated at 2 % of credit sales, as in previous years. Write-offs of bad debts during 2015 were € 1,000.

Requirements:

1. Prepare all journal entries for 2015.

2. Show the ending balances of the balance sheet accounts on Dec. 31, 2015.

VII.C. Aging of accounts receivables

The aging of accounts receivable method directly incorporates the customers’ payment histories. As more time elapses after the sale, collection becomes less likely. The $126,000 balance in Accounts Receivable on December 31, 2014, might be aged as shown below. The beginning balance in the Allowance account is amounted to € 1 000.