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)
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 Prepaid 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 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
|
Instructions
The center’s accounts were last adjusted on December 31, 20X2. Prepare the adjusting entries
necessary under the accrual basis of accounting.
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.
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.
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.
b. What is the
company’s Uncollectible Accounts expense for 20X2?
c. Compute the
net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
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.
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