Jim Armstrong operates a small company that books entertainers for theatres, parties, conventions, and so forth. The company’s fiscal year ends on June 30. Consider the following items and classify each as either (1) prepaid expense, (2) unearned revenue, (3) accrued expense, (4) accrued revenue, or (5) none of the foregoing.
a Interest owed on the company's bank loan, to be paid in early July
#3 - Accrued Expense
b Professional fees earned but not billed as of June 30
#4 - Accrued revenue
c Office supplies on hand at year-end
#1 - Prepaid expense
d An advance payment from a client for a performance next month at a convention
#2 Unearned revenue
e The payment in part (d) from the client's point of view
#1- Prepaid expense
f Amounts paid on June 30 for a 1-year insurance policy
· #1 Prepaid expense
g The bank loan payable in part (a)
· None of the foregoing
h Repairs to the firm's copy machine, incurred and paid in June
· None of the foregoing
2. Understanding the closing process. Examine the following list of accounts:
Note Payable Accumulated Depreciation: Building
Alex Kenzy, Drawing Accounts Payable
Product Revenue Cash
Accounts Receivable Supplies Expense
Utility Expense
Which of the preceding accounts
a. appear on a post-closing trial balance?
Note Payable
Accumulated Depreciation: Building
Alex Kenzy, Drawing
Accounts Payable
Cash
Accounts Receivable
b. are commonly known as temporary, or nominal, accounts?
Product Revenue
Supplies Expense
Utility Expense
c. generate a debit to Income Summary in the closing process?
Supplies Expense
Utility Expense
d. are closed to the capital account in the closing process?
Alex Kenzy, Drawing
3. Adjusting entries and financial statements. The following information pertains to Sally Corporation:
• The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned.
• Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31.
• Salaries owed to employees at year-end amounted to $1,000.
• The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period.
• The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Sally Corporation’s headquarters, beginning on November 1.
Sally Corporation’s accounting year ends on December 31.
Instructions
Analyze the five preceding cases individually and determine the following:
a. The type of adjusting entry needed at year-end (Use the following codes: A, adjustment of a prepaid expense; B, adjustment of an unearned revenue; C, adjustment to record an accrued expense; or D, adjustment to record an accrued revenue.)
b. The year-end journal entry to adjust the accounts
c. The income statement impact of each adjustment (e.g., increases total revenues by $500)
• The company previously collected $1,500 as an advance payment for services to be rendered in the future. By the end of December, one half of this amount had been earned.
B, adjustment of an unearned revenue
Unearned service revenue Debit $750
Service revenue Credit $750
Increase total revenue by $750
• Sally Corporation provided $1,500 of services to Artech Corporation; no billing had been made by December 31.
D, adjustment to record an accrued revenue.)
Accounts receivable Debit $1,500
Service revenue Credit $1,500
Increase total revenue by $1,500
• Salaries owed to employees at year-end amounted to $1,000.
C, adjustment to record an accrued expense
Salary expense Debit $1,000
Salary Payable Credit $1,000
Increase total expense by $1,000
• The Supplies account revealed a balance of $8,800, yet only $3,300 of supplies were actually on hand at the end of the period.
A, adjustment of a prepaid expense
Supplies expense Debit $5,500
Supplies Credit $5,500
Increase total expense by $5,500
• The company paid $18,000 on October 1 of the current year to Vantage Property Management. The payment was for 6 months’ rent of Sally Corporation’s headquarters, beginning on November 1.
Sally Corporation’s accounting year ends on December 31.
A, adjustment of a prepaid expense
Rent expense Debit $6,000
Prepaid Rent Credit $6,000
Increase total expense by $6,000
4. Adjusting entries. You have been retained to examine the records of Mary’s Day Care Center as of December 31, 20X3, the close of the current reporting period. In the course of your examination, you discover the following:
• On January 1, 20X3, the Supplies account had a balance of $1,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.
• Unrecorded interest owed to the center totaled $275 as of December 31.
• All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $65,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31.
• Depreciation on the school’s van was $3,000 for the year.
• On August 1, the center began to pay rent in 6-month installments of $24,000. Mary wrote a check to the owner of the building and recorded the check in Pre¬paid Rent, a new account.
• Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
• Mary’s Day Care paid insurance premiums as follows, each time debiting Pre¬paid Insurance:
Date Paid Policy No. Length of Policy Amount
Feb. 1, 20X2 1033MCM19 1 year $540
Jan. 1, 20X3 7952789HP 1 year 912
Aug. 1, 20X3 XQ943675ST 2 years 840
Instructions
The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries necessary under the accrual basis of accounting.
• On January 1, 20X3, the Supplies account had a balance of $1,350. During the year, $5,520 worth of supplies was purchased, and a balance of $1,620 remained unused on December 31.
Supplies expense Debit $5,500
Supplies Credit $5,500
• Unrecorded interest owed to the center totaled $275 as of December 31
Accrued Interest Debit $275
Interest revenue Credit $275
• All clients pay tuition in advance, and their payments are credited to the Unearned Tuition Revenue account. The account was credited for $65,500 on August 31. With the exception of $15,500 all amounts were for the current semester ending on December 31.
Unearned tuition revenue Debit $50,000
Tuition revenue Credit $50,000
• Depreciation on the school’s van was $3,000 for the year.
Depreciation expense Debit $5,500
Accumulated Dep. – Van Credit $5,500
• On August 1, the center began to pay rent in 6-month installments of $24,000. Mary wrote a check to the owner of the building and recorded the check in Prepaid Rent, a new account.
Rent expense Debit $20,000
Prepaid Rent Credit $20,000
• Two salaried employees earn $400 each for a 5-day week. The employees are paid every Friday, and December 31 falls on a Thursday.
Salary expense Debit $1,600
Salary Payable Credit $1,600
• Mary’s Day Care paid insurance premiums as follows, each time debiting Prepaid Insurance:
Date Paid Policy No. Length of Policy Amount
Feb. 1, 20X2 1033MCM19 1 year $540
Jan. 1, 20X3 7952789HP 1 year 912
Aug. 1, 20X3 XQ943675ST 2 years 840 .
Insurance expense Debit $1,132
Prepaid Insurance Credit $1,132
5. Bank reconciliation and entries. The following information was taken from the accounting records of Palmetto Company for the month of January:
Balance per bank $6,150
Balance per company records 3,580
Bank service charge for January 20
Deposits in transit 940
Interest on note collected by bank 100
Note collected by bank 1,000
NSF check returned by the bank with the bank statement 650
Outstanding checks 3,080
Instructions:
a. Prepare Palmetto’s January bank reconciliation.
b. Prepare any necessary journal entries for Palmetto.
Balance as per bank $6,150
Add: Deposit in transit 940
Less: Outstanding checks 3,080
Adjusted Bank Balance $4,010
=====
Balance as per books $3,580
Add: Note collected with interest $1,100
Less: $4,680
Bank service charge $20
NSF Check $650 670
Adjusted Book Balance $4,010
=====
(b) Journal Entries
Cash Debit $1,100
Note receivable Credit $1,000
Interest revenue Credit $ 100
Accounts receivable Debit $650
Cash Credit $650
Miscellaneous Expense Debit $20
Cash Credit $20
6. Direct write-off method. Harrisburg Company, which began business in early 20X7, reported $40,000 of accounts receivable on the December 31, 20X7, balance sheet. Included in this amount was $550 for a sale made to Tom Mattingly in July. On January 4, 20X8, the company learned that Mattingly had filed for personal bankruptcy. Harrisburg uses the direct write-off method to account for uncollectibles.
a. Prepare the journal entry needed to write off Mattingly’s account.
b. Comment on the ability of the direct write-off method to value receivables on the year-end balance sheet.
Bad debt expense Debit $550
Accounts receivable Credit $550
Direct Write-off method is used to record the loss due to personal bankruptcy of the customer, who owes the money to business. In this method, the expense is recorded at the time, when it actually happens. Hence there is no system to evaluate the Accounts receivables on the year-end balance sheet.
7. Allowance method: analysis of receivables.
At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth. Credit decisions would now be made by the sales staff.
By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department:
20X2 20X1
Sales $23,987,000 $8,423,000
Accounts Receivable, 12/31 12,444,000 1,056,000
Allowance for Uncollectible Accounts, 12/31 ? 23,000 cr.
The $12,444,000 receivables balance was aged as follows:
Age of Receivable Amount Percentage of Accounts Expected to Be Collected
Under 31 days $4,321,000 99%
31-60 days 4,890,000 90
61-90 days 1,067,000 80
Over 90 days 2,166,000 60
Assume that no accounts were written off during 20X2.
Instructions
a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.
Age of Receivable Amount Percentage of Uncollectible Amount
Under 31 days $4,321,000 1% 43,210
31-60 days 4,890,000 10 489,000
61-90 days 1,067,000 20 213,400
Over 90 days 2,166,000 40 866,400
Total Uncollectible 1,612,010
=======
b. What is the company’s Uncollectible Accounts expense for 20X2?
Balance of uncollectible on Dec. 31, 20x2 $1,612,010
Less: Balance of uncollectible on Dec. 31, 20x1 23,000
Bad debt expense $1,589,010
========
c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
Accounts Receivable, 12/31 – 2-x1 1,056,000
Less: Balance of uncollectible on Dec. 31, 20x1 23,000
Net realizable value of Accounts Receivable 1,033,000
=========
Accounts Receivable, 12/31 – 2-x2 12,444,000
Less: Balance of uncollectible on Dec. 31, 20x2 1,612,010
Net realizable value of Accounts Receivable 10,831,990
=========
d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.
20X2 20X1
Accounts Receivable, 12/31 12,444,000 1,056,000
Net realizable value 10,831,990 1,033,000
Percentage 87.05% 97.82%
The president’s decision to close the credit evaluation department was not correct as this has increased the percentage of uncollectible. In 20x1 the net realizable value of Accounts receivable was 97.82% which has come down to 87.05%.
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