(60 points; 3 points each)
Calculations and explanations:
(Intermediate numbers are shown in italics and the final
answer is shown in bold.)
In order to allow revenue recognition for credit sales, the firm must make an estimate
of the amount of bad debts (the reason for Chapter 4). Also, the entries to record the
collection of an account previously written off decrease net Accounts Receivable and
increase cash (debit Accounts Receivable and credit Allowance – no affect on net
Accounts Receivable; debit Cash and credit Accounts Receivable – decreases net
Accounts Receivable). The other answers are not true. When the sales-based method is
used, the adjusting entry will only increase or have no effect on the Allowance; the
adjusting entry cannot decrease the Allowance. Quick assets do include accounts
receivable (but not prepaid expenses).
Use the Allowance T-account to work this problem: the beginning balance of $60,760
+ $9,900 of recoveries + Bad Debt Expense – $319,780 of accounts written-off = $55,975
ending balance. Therefore, Bad Debt Expense = $305,095
$8,360,000 of credit sales; ? =
Cash increased by $517,900
, the amount of Revenue $546,300 –
increase in Accounts Receivable ($96,400 – $75,200)
[this amount was included in
Revenue but was not received in cash] –
decrease in Unearned Revenue
($49,100 – $41,900) [this amount also was included in Revenue but was not received in
cash during the current year].
Total Assets increased by $539,100
, the $517,900
increase in cash + $21,200 increase in Accounts Receivable.
increased by $546,300
, the amount of Revenues.
The aging analysis indicates that the desired ending balance in the Allowance account
($632,000 x 3% + $504,900 x 10% + $334,300 x 40).
There are several ways to work this problem. T-account analysis is useful: 1) set up
four T-accounts, one each for Accounts Receivable, Unearned Revenue, Revenue, and
Cash, and 2) enter the known amounts. One way to proceed is to move the amounts to the
Unearned Revenue account. This gives us Beginning Balance of Unearned Revenue + the
$4,253,100 of cash collected – the
decrease in Accounts Receivable ($481,300
$321,500) – $4,038,600 revenue recognized = $389,900. Therefore, beginning balance
. [Alternatively, you can assume any split of the cash and revenue numbers
you like. As long as you maintain the algebraic equality of the accounts you will get the