Accounting 220 Help Week 4- Chapter 6 & 7

Week – 3 Assignment
August 15, 2019
Week 4 Discussion 2
August 19, 2019

Accounting 220 Help Week 4- Chapter 6 & 7

B-7.01
La Piaza Restaurant has always adhered to a strict cash only policy. Management is, for the first time, considering accepting credit cards and/or extending direct credit to customers. The left side of the following table includes seven factors that management has under consideration as it contemplates its cash/credit policy alternatives. Complete the “check-off” process for each factor/policy. The first factor is completed as an example.
Cash Only Direct Extension of Credit Accept Credit Cards
Advan- tage Disadvan-tage Advan- tage Disadvan-tage Advan- tage Disadvan-tage
Opportunity to charge/collect additional income in the form of interest ✓ ✓ ✓
Likely increase in revenues
Conducting credit background check/obtaining a credit report
Significant risk of uncollectible accounts
Increased accounting cost in the form of periodic billings
Incurrence of fees on each transaction
Immediate access to proceeds
&R&”Myriad Web Pro,Bold”&20B-07.01
B-07.01
Worksheet- B-7.01
Cash Only Direct Extension of Credit Accept Credit Cards
Advan- tage Disadvan-tage Advan- tage Disadvan-tage Advan- tage Disadvan-tage
Opportunity to charge/collect additional income in the form of interest ✓ ✓ ✓
Likely increase in revenues
Conducting credit background check/obtaining a credit report
Significant risk of uncollectible accounts
Increased accounting cost in the form of periodic billings
Incurrence of fees on each transaction
Immediate access to proceeds
&L&”Myriad Web Pro,Bold”&12Name: Date: Section: &R&”Myriad Web Pro,Bold”&20B-07.01
B-07.01
B-7.02
Morrison Mountain Medical Clinic (MMMC) accepts credit card payments from its patients. Following are the batched transactions for June 11.
(1) Total charges on MasterMoney and Wisa credit cards were $21,000. These cards are “bank cards” and MMMC receives daily cash settlement directly to its bank account, net of service charges of 1.5%.
(2) Total charges on USExpress cards were $3,000. This card is not a bank card, and settlement does not occur until approximately two weeks following the date of the transaction. USExpress is known to charge a 4% fee, and this amount is recorded on the day of sale.
Prepare journal entries for the credit card transactions. Be sure to include a separate entry for the eventual collection of the USExpress charges.
B-07.02
Worksheet- B-7.02
GENERAL JOURNAL
Date Accounts Debit Credit
11-Jun
Sold merchandise on “bank card;” same day funding, net of fee of 1.5% assessed by bank
11-Jun
Sold merchandise on “nonbank card,” recorded 4% fee
25-Jun
Collected amount due from credit card company
B-7.03
Flowers and Fluff frequently receives rush orders for floral deliveries. Some of these orders are on account. Occasionally, customers do not pay for their orders. Flowers and Fluff is a small business and is not too concerned about exactly following generally accepted accounting principles. Review the two following “open” accounts and determine which should be written off. Flowers and Fluff prefers to use the direct write-off method and routinely reviews all accounts that are more than 90 days past due.
(1) Vince Colioni ordered flowers to be delivered to his girlfriend. Unfortunately, a bee was delivered along with the flowers, and Vince and his girlfriend spent the evening at the emergency room nursing a bad sting. Vince had planned to propose marriage that evening. Vince owes $125 for the flowers. The account is six months past due, and under the circumstances, the owners of Flowers and Fluff have no plans to press Vince for payment.
(2) Rebecca Warren ordered flowers to be delivered to a friend in the hospital. Rebecca owes $60, and the account is four months past due. The owners of Flowers and Fluff just realized that the bill was sent to Warren Rebecca, a different customer. Rebecca Warren has since moved to a distant town, but was last known to be a responsible person. The owners of Flowers and Fluff are now trying to get a new address for Rebecca Warren from her friend that was in the hospital.
(a) When and how might a business choose to ignore GAAP and use the direct write-off method?
(b) What is the USA tax code position on the direct write-off method, and how might Flowers and Fluff be simplifying their record keeping issues by using the direct write-off method? Could a large corporation that must meet financial reporting obligations to shareholders select this simplifying option?
(c) Prepare the journal entry necessary to write off the “bad” account.
(d) How does the existence of “other” questionable accounts potentially produce misleading financial reports?
B-07.03
Worksheet- B-7.03
(a)
(b)
(c) GENERAL JOURNAL
Date Accounts Debit Credit
Dec. 31
(d)
B-07.03
B-7.04
Pablo’s Precision Parts distributes carbon fiber parts for customization of sports cars. The company has a broad customer base, and routinely sells on credit. Annually, the company reviews and updates its allowance for uncollectible accounts. Periodic write-offs against the allowance account are made throughout the year when individual accounts are deemed to be worthless. Following are relevant facts for the current year:
Prior to recording any year-end adjustments, the total balance of all accounts receivable amounted to $2,300,000. The existing Allowance for Uncollectible Accounts had a balance of $18,000. No entry was made during the year to increase this account, but $40,000 of uncollectible accounts were written off against the allowance during the year.
(a) What was the beginning-of-year balance for the Allowance for Uncollectible Accounts?
(b) Prepare a summary journal entry that reflects the $40,000 of write-offs already recorded by Pablo’s.
(c) Assuming that the year-end allowance should equal 3% of outstanding receivables, what end-of-year adjusting entry is needed?
(d) How will the accounts receivable and allowance appear on the balance sheet?
(e) How much expense will appear in the annual income statement as uncollectible accounts expense?
B-07.04
Worksheet- B-7.04
(a)
(b) GENERAL JOURNAL
Date Accounts Debit Credit
various
To record the write off of uncollectible accounts
(c) GENERAL JOURNAL
Date Accounts Debit Credit
Dec. 31
To adjust the allowance account from a $18,000 balance to the target balance of _________________________
(d) Accounts Receivable
Less: Allowance for Uncollectible Accounts
(e)
B-07.04
B-7.05
Wiggins Corporation utilizes an accounting software package that is capable of producing a detailed aging of outstanding accounts receivable. Following is the aging schedule as of December 31, 20X2.
AGE AMOUNT OUTSTANDING
0 to 30 days $ 1,200,000
31 to 60 days 700,000
61 to 120 days 200,000
Over 120 days 25,000
Casper Wiggins has owned and operated Wiggins Corporation for many years and has a very good sense of the probability of collection of outstanding receivables, based on an aging analysis. The following table reveals the likelihood of collection:
AGE PROBABILITY OF COLLECTION
0 to 30 days 98%
31 to 60 days 90%
61 to 120 days 75%
Over 120 days 50%
(a) Prepare an aging analysis and show how accounts receivable and the related allowance for uncollectibles should appear on the balance sheet at December 31.
(b) Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $15,000 credit.
(c) Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $5,000 debit. How could the allowance account have contained a debit balance?
B-07.05
Worksheet- B-7.05
(a) AGE BALANCE ESTIMATED % UNCOLLECTIBLE ESTIMATED AMOUNT UNCOLLECTIBLE (b)
GENERAL JOURNAL
0 to 30 days Date Accounts Debit Credit
31 to 60 days Dec. 31
61 to 120 days
Over 120 days
Accounts Receivable (c)
Less: Allowance for Uncollectible Accounts GENERAL JOURNAL
Date Accounts Debit Credit
Dec. 31
B-07.05(b,c)
B-7.06
Morrison Supply sells pressured air devices that assist patients with breathing disorders during sleep. These devices are delivered to patients immediately upon completion of a diagnostics exam, and are subsequently billed to insurance companies. Insurance companies sometime refuse to pay and/or only agree to a reduced price. Patients are then responsible for any amount denied by the insurance company, but are often unable or unwilling to pay. Because clinical standards of cleanliness must be maintained, Morrison is unable to accept returns for resale to others. Morrison is reluctant to litigate to collect unpaid amounts. As a result, Morrison experiences a high rate of uncollectible accounts, and prepares a monthly adjusting entry for uncollectibles that is equal to 20% of sales.
Morrison’s Monthly sales and write-offs for the first quarter of 20X7 follow:
MONTH SALES ACTUAL WRITE-OFFS
Jan. $630,000 $100,000
Feb. $480,000 $80,000
Mar. $590,000 $140,000
(a) Prepare monthly journal entries to summarize sales on account, the recording of the provision for uncollectibles, and the actual write-offs.
(b) The provision for uncollectibles is established at 20% of sales. Why are the monthly write-offs not also proportional to that month’s sales? Does the amount written off in a particular month impact net income for that month?
(c) Some companies book allowances based on credit sales, rather than total sales. Morrison’s allowance was based on total sales. Why might this be logical for Morrison, and when might the other alternative make more sense?
(d) Morrison’s CFO attended a trade group conference, and learned providers of this service in other cities have begun offering a 10% cash discount if the patient will pay the full amount themselves. The patient then deals directly with their insurance carrier for reimbursement. What are your thoughts on this policy?
(e) Morrison Supply is contemplating issuing shares of stock to a group of outside investors. The CEO has requested the CFO to begun booking the allowance account at 12% of sales, rather than 20% of total sales. What might be the motivation behind this request, and how should the CFO respond?
B-07.06
Worksheet- B-7.06
(a) GENERAL JOURNAL
Date Accounts Debit Credit
Jan. 31
To record January sales
Jan. 31
To establish the uncollectible accounts expense for January sales (20%)
Jan. 31
To write-off accounts deemed uncollectible
GENERAL JOURNAL
Date Accounts Debit Credit
Feb. 28
To record February sales
Feb. 28
To establish the uncollectible accounts expense for February sales (20%)
Feb. 28
To write-off accounts deemed uncollectible
GENERAL JOURNAL
Date Accounts Debit Credit
Mar. 31
To record March sales
Mar. 31
To establish the uncollectible accounts expense for March sales (20%)
Mar. 31
To write-off accounts deemed uncollectible
(b)
(c)
(d)
(e)
B-07.06
B-7.07
Wang Corporation follows generally accepted accounting principles in accounting for uncollectibles. Wang received notification from a bankruptcy court that its customer, Timber Creek, had been adjudicated and released from all claims presently pending against it by Wang Corporation. Frank Wang, owner of Wang Corporation, was not at all pleased with this decision. Frank had anticipated recovering at least $50,000 from Timber Creek, and that balance remained in the Accounts Receivable accounts of Wang Corporation. Because Wang Corporation has no further remedies for collection, Frank directed the accounting department to prepare a journal entry to write off the account of Timber Creek.
(a) Prepare the journal entry to write off the Timber Creek account.
(b) Explain why the actual write-off will not result in a reduction of Wang Corporation’s income?
(c) Suppose Timber Creek recovered from its bankruptcy and eventually voluntarily paid the $50,000 “owed” to Wang. Prepare Wang’s journal entries to record the unexpected recovery.
B-07.07
Worksheet- B-7.07
(a), (c)
GENERAL JOURNAL
Date Accounts Debit Credit
(b)
B-07.07
B-7.08
Supreme Vacuum uses television advertising blitzes to generate consumer interest in its highly-touted floor cleaners. Customers are directed to a website for more information. Once on the website, customers are constantly confronted with a “video game” where they can use icon-like vacuums to suck up coupons that float on and off their browser windows. At check out, customers are able to clean the contents of their imaginary vacuum and select one of the coupons to apply against their purchase. The best coupon is a no-money-down, 4-equal-monthly-payments, coupon. “Magically”, every customer will find at least one of these coupons. Virtually all customers will use this coupon in making their final purchases. As a result, Supreme carries a substantial balance in accounts receivable. It is imperative that Supreme manage credit risk, and careful attention is paid to the “accounts receivable turnover ratio” and the “days outstanding.”
During 20X5, net credit sales were $6,000,000. The sales were evenly spread throughout the year. The beginning-of-year net realizable value of accounts receivable was $2,150,000 and the end-of-year balance was $2,650,000.
(a) Calculate the “accounts receivable turnover ratio” and the “days outstanding.”
(b) Evaluate the information from part (a) and determine if Supreme’s customer base is in compliance the 4-equal-monthly payments agreement.
(c) In addition to the facts above, suppose Supreme ran a major holiday sales campaign in December of 20X5. This campaign promised no payments until 20X6! This campaign generated an additional $3,000,000 in credit sales (and resulted in an end-of-year receivable balance of $5,650,000). Can Supreme record these sales under generally accepted accounting principles, and what is the impact on the ratios (compared to the values you computed in part (a))?
B-07.08
Worksheet- B-7.08
(a) Accounts Receivable Turnover Ratio =
Days Outstanding =
(b)
(c)
B-07.08
B-7.09
A “Note” is a written promise to pay a definite amount of money on a specific future date. Specific terminology is used to describe various attributes of a note. Match the following terms to their correct description.
(1) Payee
(2) Principal
(3) Dishonor
(4) Maker
(5) Interest
(6) Maturity
(a) Stated amount of the note
(b) Party to whom payment will be made
(c) Party promising to make payment
(d) Charge imposed on the borrower of funds for the use of money
(e) Date the note will be due
(f) Refusing to pay a note at maturity
B-07.09
Worksheet- B-7.09
(1) Payee
(2) Principal
(3) Dishonor
(4) Maker
(5) Interest
(6) Maturity
B-07.09
B-7.10
Vinay Sanja was interviewing for a job at the State Bank of India. The bank requires all job applicants to take a competency test on basic money mathematics. Vinay has completed the interest calculations portion of the exam. Below are his questions and answers. Vinay must correctly answer in at least 3 cases to be eligible for the job. Evaluate and correct Vinay’s answers. Does he qualify for the job?
(a) Assume the bank holds a 400,000 Indian Rupee (INR) note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?
Answer: 400,000 X 10% X 60/360 = 6,666.67 400,000 + 6,666.67 = 406,666.67
(b) Assume the bank holds a INR 400,000 note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 365 day year and actual days outstanding are used in all calculations. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?
Answer: 400,000 X 10% X 92/365 = 10,082.19
(c) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X5?
Answer: Zero, the note is not due until 20X6
(d) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X6?
Answer: 1,000,000 X 8% X 270/360 = 600,000
B-07.10
Worksheet- B-7.10
Vinay missed ___ questions and___ eligible for the job. Correct Vinay’s paper below:
(a) Assume the bank holds a 400,000 Indian Rupee (INR) note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?
Answer: 400,000 X 10% X 60/360 = 6,666.67 400,000 + 6,666.67 = 406,666.67
(b) Assume the bank holds a INR 400,000 note receivable dated June 1, 20X1. This note matures on August 31, 20X1. This note is written to assume a 365 day year and actual days outstanding are used in all calculations. The annual interest rate is stated at 10%. What is the maturity value of the note, including interest?
Answer: 400,000 X 10% X 92/365 = 10,082.19
(c) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X5?
Answer: Zero, the note is not due until 20X6
(d) Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual interest rate is stated at 8%. How much interest income should the bank record for its accounting year ending December 31, 20X6?
Answer: 1,000,000 X 8% X 270/360 = 600,000
B-07.10
B-7.11
Prepare journal entries for each of the following transactions:
On December 1, 20X5, Musaka received a 10%, 1-year, note receivable from Lambert. This note was issued in payment for a $24,000 outstanding account receivable.
On December 31, 20X5, Musaka recorded an end-of-year adjusting entry to record accrued interest on the note receivable.
On November 30, 20X6, Lambert paid Musaka the full amount due on the note receivable.
How would the November 30 entry differ if Lambert defaulted on the payment?
B-07.11
Worksheet- B-7.11
GENERAL JOURNAL
Date Accounts Debit Credit
Dec. 1
To record issuance of 10%, 1-year note, in exchange for outstanding receivable
Dec. 31
To accrued interest on note ($24,000 X 10% X 1/12)
Nov. 30
To record interest income (11 months) and collection of note receivable and previously accrued interest
B-07.11
I-7.01
Rocks Shoes is a three-year old company that started out producing specialty shoes for rock climbing and mountaineering. However, the shoe’s unique styling has made them a hit with the general public and the company is now growing rapidly. Rocks needs additional capital to expand its manufacturing capacity, and it plans to sell additional shares of stock to raise money.
During its first three years in operation, Rocks used the direct-write off method to account for uncollectible accounts. Information about sales, write-offs, and the company’s income follows:
Sales Write-offs Net Income
Year 1 $ 2,400,000 $ – $ 100,000
Year 2 6,300,000 24,000 300,000
Year 3 12,900,000 111,000 550,000
Rocks is required to have audited financial statements prior to offering its shares of stock for sale. This will require the company to recompute its income under generally accepted accounting principles for each of the three prior years. The only item that requires adjustment is the treatment of uncollectible accounts. Rocks estimates that 3% of sales ultimately prove to be uncollectible — 1% in the year following a sale, and 2% in the year thereafter.
(a) Prepare the journal entries that were used by Rocks for each year under the direct write-off method.
(b) Determine if the actual write-offs are aligning with the estimates provided by Rocks. Why does GAAP require an allowance method for uncollectibles?
(c) Prepare the journal entries that would have been made each year, had the percentage of sales technique been used to establish an allowance account. Be sure to include entries to both establish the allowance, and to record the write offs.
(d) How much is the corrected net income for each year? Will the reduction in income potentially impact the amount of capital that can be raised?
I-07.01
Worksheet I-7.01
(a) GENERAL JOURNAL
Date Accounts Debit Credit
Year 1 No Entry
Year 2
Year 3
(b)
(c) GENERAL JOURNAL
Date Accounts Debit Credit
Year 1
Year 2
Year 2
Year 3
Year 3
(d)
I-07.01
I-7.02
Myssie Cardenas was recently hired as the chief financial officer for Barajas Corporation. At the time Myssie was hired, the company had just completed the accounting cycle for the year ending December 31, 20X7. Myssie began her new job by reviewing the following information about sales and receivables activity during the year:
Beginning accounts receivable $ 1,500,000
Beginning allowance for uncollectibles 40,000
Sales on account 6,000,000
Collections on account 4,800,000
Sales discounts 68,000
Accounts written-off 33,000
Additions to allowance for uncollectible accounts 1% of net sales
(a) Based on her review, Myssie prepared some handwritten notes in journal entry form summarizing the above sales, collections, discounts, write-offs, and additions to the allowance. She wanted to compare her entries to what had actually been recorded by the company. How should her summary entries appear?
(b) After completing her review, Myssie concluded that beginning in 20X8, the company would switch to a balance sheet approach for providing for uncollectible accounts. She estimates that the Allowance for Uncollectible Accounts should include an end-of-year balance equal to 3% of total gross receivables. Prepare summary journal entries for 20X8 to capture the following information, and to update the allowance account from its beginning of year balance (see part (a) to determine the beginning balance).
Sales on account 6,600,000
Collections on account 5,900,000
Sales discounts 88,000
Accounts written-off 53,000
(c) What is the objective in deciding which technique is appropriate for estimating uncollectibles? What factors perhaps influenced Myssie’s decision to adopt a new technique?
I-07.02
Worksheet I-7.02
(a) GENERAL JOURNAL
Date Accounts Debit Credit
To record sales on account
To record collections on account
To record sales discounts
To write-off uncollectible accounts
To increase allowance
(b) GENERAL JOURNAL
Date Accounts Debit Credit
To record sales on account
To record collections on account
To record sales discounts
To write-off uncollectible accounts
To increase allowance (see calculations on next page)
Receivables Allowance
Beginning balance (20X7) $ 1,500,000 $ 40,000
Sales on account (20X7) – –
Collections on account (20X7) – –
Sales discounts (20X7) – –
Accounts written off (20X7) – –
Additions to allowance (20X7) – –
Ending balance (20X7) $ – $ –
Receivables Allowance
Beginning balance (20X8) $ – $ –
Sales on account (20X8) – –
Collections on account (20X8) – –
Sales discounts (20X8) – –
Accounts written off (20X8) – –
Subtotals $ – $ –
Additions to allowance (20X8) – –
Ending balance (20X8) $ – $ –
(c)
I-07.01


 

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