TC Questions and Answers Part 7

2/21/2011 9:28 PM
Essay
Question Micah Company uses the allowance method of accounting for bad debts. The
following summary schedule was prepared from an aging of accounts receivable outstanding
on December 31 of the current year.
No. of Days Probability
Outstanding Amount of Collection
0-31 days $675,000 97%
31-60 days 270,000 90%
Over 60 days 135,000 85%
The following additional information is available for the current year:
Net credit sales for the year $5,400,000
Allowance for bad debts:
Balance, January 1 60,750(cr.)
Balance before adjustment, December 31 2,700(cr.)
Miles bases its estimate of bad debts on the aging of accounts receivable. Prepare the
appropriate journal entry to record bad debt expense for the current year ending December
31.

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Answer

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$675,000 ´ (1 - 0.97) = $20,250

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$270,000 ´ (1 - 0.90) = $27,000

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$135,000 ´ (1 - 0.85) = $20,250
$67,500 total bad debt in current Accounts Receivable

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account
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Current balance in "Allowance for Bad Debts" = $2,700
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Entry required to bring "Allowance" account to correct balance = $67,500 - $2,700
= $64,800
Journal entry:
Bad Debt Expense 64,800
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Allowance for Bad Debts 64,800

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Question At the end of the year, Skipper Company had the following information:
Credit sales for the year $650,000
Accounts receivable, beginning of year 135,000
Allowance for bad debts, beginning of year 47,000
Allowance for bad debts, end of year 62,000
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Cash collections during the year 665,000

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Bad debt expense for the year 55,000

Calculate the amount of credit accounts that were verified as being uncollectible during the
year.
Answer
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Allowance for bad debts, beginning of year $47,000

+Bad debt expense for the year 55,000
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-Verified uncollectible accounts xxx

Allowance for bad debts, ending of year 62,000
Credit accounts that were verified as being uncollectible are $40,000
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Essay
Question The following are summary financial data of the three most recent years for two
companies:
2013 2012 2011
Net Sales (in millions)
Ayala, Inc. $ 7,400 $ 7,850 $ 7,960

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 Mendez, Inc. 14,650 13,200 12,850
Net Accounts Receivable (in millions)
Ayala, Inc. 1,200 1,450 1,160
Mendez, Inc. 4,320 4,640 4,450
a. Using the data above, compute the accounts receivable turnover and average collection
period for each company for 2013 and 2012. (Round to two decimal places)
b. Which company appears to have a better credit collection policy? Explain why.
Answer
a. Accounts receivable turnover
Ayala, Inc.: 2013: $ 7,400/[($1,200 + $1,450)/2] = 5.58 times
2012: $ 7,850/[($1,450 + $1,160)/2] = 6.02 times
Mendez, Inc.: 2013: $14,650/[($4,320 + $4,640)/2] = 3.27 times
2012: $13,200/[($4,640 + $4,450)/2] = 2.90 times
Average collection period
Ayala, Inc.: 2013: 365/5.58 = 65.41 days
2012: 365/6.02 = 60.63 days
Mendez, Inc.: 2013: 365/3.27 = 111.62 days
2012: 365/2.90 = 125.86 days
b. Ayala manages accounts receivable better. The turnover is higher and the
number of days to collect receivables is shorter.

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Question The following are summary financial data of the three most recent years for Birch

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company:
2013 2012 2011

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Net Sales 948,000 876,000 745,000

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Net Accounts Receivable 35,000 45,500 50,800
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Cost of Goods Sold 784,000 798,000 655,000
Net Accounts Payable 19,800 25,700 26,400
Using the data above compute the following ratios for 2013 and 2012:
a. Accounts receivable turnover
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b. Average collection period

Answer
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a. Accounts receivable turnover

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2013: $948,000/[($35,000 + $45,500)/2] = 23.55 times

2012: $876,000/[($45,500 + $50,800)/2] = 18.19 times
b. Average collection period
2013: 365/23.55 = 15.50 days
2012: 365/18.19 = 20.06 days
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33 of 36 2/21/2011 9:28 PM
Essay
Question In July, Romish Company sold 1,250 financial calculators for $30 each. Each
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calculator had cost Romish $20 to manufacture. Romish promises a replacement calculator if
the calculator fails for any reason within the next 3 years. From past experience, Romish has
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learned that about 2 percent of the calculators have to be replaced during this time. Also
during July, Romish Company replaced 22 calculators.
Based on this information:
a. Prepare the journal entry required to recognize Romish's estimated warranty expense for
July.
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b. Prepare the journal entry required to recognize the actual expenses incurred from the
returned calculators.
Answer
a. Warranty Expense 500
Estimated Liability for Service 500
[1,250 ´ $20 ´ 2%]
b. Estimated Liability for Service 440
Supplies 440

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 [22 ´ $20]
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Essay
Question Mitchell Company has the following information from its records and from the May
bank statement:
Cash balance per books $40,000
Ending cash balance per bank statement 50,000
Deposits made, not received by bank 12,000
Checks written, not processed by bank 20,000
Interest earned on bank account 100
Bank service charge 140
Direct deposit by customer (on account receivable) 2,040
Based on this information prepare a bank reconciliation for May.
Answer
Balance per bank $50,000Balance per books $40,000
+Deposits in transit 12,000+Interest earned on
account
100
-Outstanding checks (20,000)+Direct deposit 2,040
-Service charge (140)

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Adjusted bank balance $42,000Adjusted book balance $42,000

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Question The following information is available for Binford Company:
· The May 2012 bank statement showed the following:

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Balance, May 1 $21,000.00
Canceled checks 13,904.20
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Deposits 16,489.65
Interest earned by Binford 28.75
Bank service charge 18.00
Balance, May 31 23,596.20
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· Binford Company's cash accounts showed the following for May:

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Balance, May 1 $20,971.25

Debits 22,700.40
Credits 22,886.34
Balance, May 31 20,785.31
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· Outstanding checks totaled $9,100.14.

· Deposits in transit totaled $8,000.00.
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· The bank statement reveals that Binford Company's account has been reduced by $100.
The company had deposited a $100 check from one of its customers, which was
subsequently returned to Binford's bank and marked "Not Sufficient Funds."
· The bank collected an $1,800 note for Binford Company. The company was not aware
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of the collection until receiving the bank statement.

Prepare a bank reconciliation for May 31, 2012.
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Answer
Binford Company
Bank Reconciliation
May 31, 2012
Balance per bank $23,596.20 Balance per books $20,785.31
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Add: Deposits in transit 8,000.00 Add: Note collected 1,800.00

Interest earned 28.75
Less: Outstanding
checks
(9,100.14) Less: Service charge (18.00)
_________ NSF check (100.00)
Corrected bank balance $22,496.06 $22,496.06

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Essay
Question A U.S. company entered into a sales transaction with a Japanese company on
September 15 for 200,000 yen. The U.S. company prepares quarterly financial statements.
The Japanese company will pay for the sale on November 20. The exchange rates were as
follows:
1 Yen
September 15 $0.0125
September 30 0.0109
November 20 0.0114
Prepare the appropriate journal entries to record the sale, the quarterly adjustment, and the
collection.
Answer
September 15:Accounts Receivable 2,500
Sales Revenue 2,500
[200,000 ´ $0.0125]
September 30:Foreign Exchange Loss 320
Accounts Receivable 320
[$2,500 - (200,000 ´ $0.0109)]
November 20:Cash 2,280

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Accounts Receivable 2,180
Foreign Exchange Gain 100

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[200,000 ´ $0.0114; $2,500 - $320]

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