E5–21 On January 1, 2018, the general ledger of 3D Family Fireworks includes the following account balances:AccountsDebitCreditCash$ 23,900Accounts Receivable13,600Allowance for Uncollectible Accounts$ 1,400Supplies2,500Notes Receivable (6%, due in 2 years)20,000Land77,000Accounts Payable7,200Common Stock96,000Retained Earnings 32,400 Totals$137,000$137,000During January 2018, the following transactions occur:January 2Provide services to customers for cash, $35,100.January 6Provide services to customers on account, $72,400.January 15Write off accounts receivable as uncollectible, $1,000.January 20Pay cash for salaries, $31,400.January 22Receive cash on accounts receivable, $70,000.January 25Pay cash on accounts payable, $5,500.January 30Pay cash for utilities during January, $13,700.Required:1.Record each of the transactions listed above.2.Record adjusting entries on January 31.a.At the end of January, $5,000 of accounts receivable are past due, and the company estimates that 20% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 5% will not be collected. The note receivable of $20,000 is considered fully collectible and therefore is not included in the estimate of uncollectible accounts.b.Supplies at the end of January total $700.c.Accrued interest revenue on notes receivable for January. Interest is expected to be received each December 31.d.Unpaid salaries at the end of January are $33,500.3.Prepare an adjusted trial balance as of January 31, 2018, after updating beginning balances (above) for transactions during January (Requirement 1) and adjusting entries at the end of January (Requirement 2).4.Prepare an income statement for the period ended January 31, 2018.5.Prepare a classified balance sheet as of January 31, 2018.6.Record closing entries.7.Analyze how well 3D Family Fireworks manages its receivables:a.Calculate the receivables turnover ratio for the month of January (Hint:For the numerator, use total services provided to customers on account). If the industry average of the receivables turnover ratios for the month of January is 4.2 times, is the company collecting cash from customers more or less efficiently than other companies in the same industry?b.Calculate the ratio of Allowance for Uncollectible Accounts to Accounts Receivable at the end of January. Based on a comparison of this ratio to the same ratio at the beginning of January, does the company expect an improvement or worsening in cash collections from customers on credit sales?Page 254PROBLEMS: SET ACalculate the amount of revenue to recognize (LO5–1)P5–1A Assume the following scenarios.Scenario 1:During 2018, IBM provides consulting services on its mainframe computer for $11,000 on account. The customer does not pay for those services until 2019.Scenario 2:On January 1, 2018, Gold’s Gym sells a one-year membership for $1,200 cash. Normally, this type of membership would cost $1,600, but the company is offering a 25% “New Year’s Resolution” discount.Scenario 3:During 2018, The Manitowoc Company provides shipbuilding services to the U.S. Navy for $450,000. The U.S. Navy will pay $150,000 at the end of each year for the next three years, beginning in 2018.Scenario 4:During 2018, Goodyear sells tires to customers on account for $35,000. By the end of the year, collections total $30,000. At the end of 2019, it becomes apparent that the remaining $5,000 will never be collected from customers.Required:For each scenario, calculate the amount of revenue to be recognized in 2018.Record transactions related to credit sales and contra revenues (LO5–1, 5–2)P5–2A Outdoor Expo provides guided fishing tours. The company charges $300 per person but offers a 20% discount to parties of four or more. Consider the following transactions during the month of May.May 2Charlene books a fishing tour with Outdoor Expo for herself and four friends at the group discount price ($1,200 = $240 × 5). The tour is scheduled for May 7.May 7The fishing tour occurs. Outdoor Expo asks that payment be made within 30 days of the tour and offers a 6% discount for payment within 15 days.May 9Charlene is upset that no one caught a single fish and asks management for a discount. Outdoor Expo has a strict policy of no discounts related to number of fish caught.May 15Upon deeper investigation, management of Outdoor Expo discovers that Charlene’s tour was led by a new guide who did not take the group to some of the better fishing spots. In concession, management offers a sales allowance of 30% of the amount due.May 20Charlene pays for the tour after deducting the sales allowance.Required:1.Record the necessary transaction(s) for Outdoor Expo on each date.2.Show how Outdoor Expo would present net revenues in its income statement.Record transactions related to accounts receivable(LO5–3, 5–5)P5–3A The following events occur for The Underwood Corporation during 2018 and 2019, its first two years of operations.June 12, 2018Provide services to customers on account for $41,000.September 17, 2018Receive $25,000 from customers on account.December 31, 2018Estimate that 45% of accounts receivable at the end of the year will not be received.March 4, 2019Provide services to customers on account for $56,000.May 20, 2019Receive $10,000 from customers for services provided in 2018.July 2, 2019Write off the remaining amounts owed from services provided in 2018.October 19, 2019Receive $45,000 from customers for services provided in 2019.December 31, 2019Estimate that 45% of accounts receivable at the end of the year will not be received.Required:1.Record transactions for each date.2.Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts.3.Calculate the net realizable value of accounts receivable at the end of 2018 and 2019.Record transactions related to uncollectible accounts(LO5–4, 5–5)Page 255P5–4A Pearl E. White Orthodontist specializes in correcting misaligned teeth. During 2018, Pearl provides services on account of $590,000. Of this amount, $80,000 remains receivable at the end of the year. An aging schedule as of December 31, 2018, is provided below.Age GroupAmount ReceivableEstimated Percent UncollectibleNot yet due$40,000 4%0–90 days past due 16,00020%91–180 days past due 11,00025%More than 180 days past due 13,00080% Total$80,000Required:1.Calculate the allowance for uncollectible accounts.2.Record the December 31, 2018, adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $5,000 (credit).3.On July 19, 2019, a customer’s account balance of $8,000 is written off as uncollectible. Record the write-off.4.On September 30, 2019, the customer whose account was written off inRequirement 3 unexpectedly pays the full amount. Record the cash collection.Compare the direct write-off method to the allowance method (LO5–3, 5–6)P5–5A In an effort to boost sales in the current year, Roy’s Gym has implemented a new program where members do not have to pay for their annual membership until the end of the year. The program seems to have substantially increased membership and revenues. Below are year-end amounts.Membership RevenuesAccounts ReceivableLast year$150,000$ 6,000Current year 450,000 170,000Arnold, the owner, realizes that many members have not paid their annual membership fees by the end of the year. However, Arnold believes that no allowance for uncollectible accounts should be reported in the current year because none of the nonpaying members’ accounts have proven uncollectible. Arnold wants to use the direct write-off method to record bad debts, waiting until the end of next year before writing off any accounts.Required:1.Do you agree with Arnold’s reasoning for not reporting any allowance for future uncollectible accounts? Explain.2.Suppose that similar programs in the past have resulted in uncollectible accounts of approximately 70%. If Arnold uses the allowance method, what should be the balance of Allowance for Uncollectible Accounts at the end of the current year?3.Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Arnold uses the direct write-off method? Ignore tax effects.Using estimates of uncollectible accounts to overstate income (LO5–3)P5–6A Willie Cheetum is the CEO of Happy Foods, a distributor of produce to grocery store chains throughout the Midwest. At the end of the year, the company’s accounting manager provides Willie with the following information, before any adjustment.Accounts receivable$1,100,000Estimated percentage uncollectible9%Allowance for uncollectible accounts$40,000 (credit)Operating income$260,000Willie’s compensation contract states that if the company generates operating income of at least $210,000, he will get a salary bonus early next year.Page 256Required:1.Record the adjustment for uncollectible accounts using the accountant’s estimate of 9% of accounts receivable.2.After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Willie get his salary bonus?3.Willie instructs the accountant to record the adjustment for uncollectible accounts using 6% rather than 9% of accounts receivable. Now will Willie get his salary bonus? Explain.4.By how much would total assets and operating income be misstated using the 6% amount?Overestimating future uncollectible accounts(LO5–3, LO5–5)P5–7A Humanity International sells medical and food supplies to those in need in underdeveloped countries. Customers in these countries are often very poor and must purchase items on account. At the end of 2018, total accounts receivable equal $1,300,000. The company understands that it’s dealing with high credit risk clients. These countries are often in the middle of a financial crisis, civil war, severe drought, or some other difficult circumstance. Because of this, Humanity International typically estimates the percentage of uncollectible accounts to be 35% (= $455,000). Actual write-offs in 2019 total only $300,000, which means that the company significantly overestimated uncollectible accounts in 2018. It appears that efforts by the International Monetary Fund (IMF) and the United Nations (UN), and a mild winter mixed with adequate spring rains, have provided for more stable economic conditions than were expected, helping customers to pay on their accounts.Required:1.Record the adjustment for uncollectible accounts at the end of 2018, assuming there is no balance in Allowance for Uncollectible Accounts at the end of 2018 before any adjustment.2.By the end of 2019, Humanity International has the benefit of hindsight to know that estimates of uncollectible accounts in 2018 were too high. How did this overestimation affect the reported amounts of total assets and expenses at the end of 2018? Ignore tax effects.3.Should Humanity International prepare new financial statements for 2018 to show the correct amount of uncollectible accounts? Explain.Record long-term notes receivable and interest revenue (LO5–7)P5–8A On December 1, 2018, Liang Chemical provides services to a customer for $90,000. In payment for the services, the customer signs a three-year, 10% note. The face amount is due at the end of the third year, while annual interest is due each December 1.Required:1.Record the acceptance of the note on December 1, 2018.2.Record the interest collected on December 1 for 2019 and 2020, and the adjustment for interest revenue on December 31 for 2018, 2019, and 2020.3.Record the cash collection on December 1, 2021.Calculate and analyze ratios(LO5–8)P5–9A Assume selected financial data for Walmart and Target, two close competitors in the retail industry, are as follows:($ in millions)Net SalesBeginning Accounts ReceivableEnding Accounts ReceivableWalmart$443,854$5,089$5,937Target68,466 6,153 5,927Required:1.Calculate the receivables turnover ratio and average collection period for Walmart and Target. Round your answers to one decimal place. Which company has better ratios? Compare your calculations with those for Tenet Healthcare and LifePoint Hospitals reported in the chapter text. Which industry maintains a higher receivables turnover?2.Because most companies do not separately report cash sales and credit sales, the calculations used here and in the chapter text use companies’ reported amount of net sales, which is a combination of cash sales and credit sales. How would including cash sales affect the receivables turnover ratio? How does this help to explain your answer in Requirement 1 above?
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