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).
The â€œSales Discountsâ€ and â€œSales Returns and Allowancesâ€ accounts are both examples of
The â€œAllowance for Doubtful Accountsâ€ account is best described as a contra-liability.
The amount shown on the balance sheet called â€œNet Accounts Receivableâ€ is determined by
adding together the balances in the â€œAccounts Receivableâ€ and â€œAllowance for Uncollectible
â€œNet Accounts Receivableâ€ can also be called net realizable value.
The â€œAllowance Methodâ€ 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.
The â€œAllowance Methodâ€ of accounting for bad debts is an application of GAAP whereas the
â€œDirect Write-Off Methodâ€ is not.
When a companyâ€™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.
As a companyâ€™s receivables turnover ratio increases, the average collection period in terms
of days should be decreasing.
Before the year-end journal entry to record bad debts, if the â€œAllowance for Doubtful
Accountsâ€ account has a debit balance, the estimate of uncollectible accounts at the
beginning of the year was too low.
The â€œagingâ€ (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.
When preparing an aging report, most companies should expect that the longer a particular
customerâ€™s account has been outstanding, the less likely it is to become uncollectible.
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
Green provided services worth $10,000 on account, terms 2/10, n/30.
Green granted the customer a $400 sales allowance.
Greenâ€™s customer paid off their account in full.
Required: Record the above three transactions in the general journal below.
Accounting Check âˆš Since the customer has completely paid off its account receivable, is the â€œAccount
Receivableâ€ balance equal to zero? If your answer is not â€œyesâ€, please go back and check your calculations
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 â€œnet sales revenueâ€ and â€œnet
Possible answers are increase, decrease, or no effect. The first line is completed as an example.
As the â€œDepreciation Expenseâ€ account balance increasesâ€¦
As the â€œSales Revenueâ€ account balance increasesâ€¦
As the â€œSales Discountâ€ account balance increasesâ€¦
As the â€œSales Returns and Allowanceâ€ account balance
As the â€œBad Debt Expenseâ€ account balance increases
As the â€œInterest Revenueâ€ account balance increases
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 â€œAccounts Receivableâ€ and credited â€œService
Revenueâ€ 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?
B. Assuming Newton has a calendar year-end, prepare in the general journal below the following three
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 noteâ€™s face value plus accrued interest on April 1, 20X7.
C. Accounting Check âˆš Do your credits to the â€œInterest Revenueâ€ account add up to the total interest
revenue amount from part â€œAâ€? 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 â€œyesâ€ to both questions, please go back and check your calculations
Problem V: (13 points) Ritter Inc.â€™s trial balance indicates the following select account balances at the end
of 20X1 before the year-end adjustment to record bad debts:
Trial Balance (partial)
Allowance for Doubtful Accounts
Sales Returns and Allowances
Bad Debts Expense
A. What were Ritterâ€™s net sales for 20X1?
B. Assume at the end of 20X1, Ritterâ€™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
C. Assuming Ritter has posted the above journal entry to its t-accounts, answer the following four questions:
What is the â€œNet Accounts Receivableâ€ balance it will report on its 12/31/X1
How much do customers owe Ritter at year-end?
Out of how much is owed, how much does the company expect to actually
What should be the â€œBad Debt Expenseâ€ account balance it reports on its income
statement for 20X1?
Problem VI: (14 points) Summer Inc.â€™s trial balance indicates the following select account balances at the
end of 20X1 before the year-end adjustment to record bad debts:
Trial Balance (partial)
Accounts Receivable â€“ 12/31/X1
Allowance for Doubtful Accounts (AFDA) â€“ 12/31/X1
Bad Debts Expense â€“ 1/1/X1
A. Assume at the end of 20X1, Summerâ€™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.
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 balance
is deemed to be uncollectible and will be specifically written off.
Required: Prepare the specific write-off journal entry to record this uncollectible account.
C. How should a specific write-off journal entry (see letter â€œBâ€ above) affect a companyâ€™s net accounts
receivable balance? Circle or highlight one of the following: