On January 1, 2021, the general ledger of Big Blast Fireworks includes the following account balances:Accounts Debit CreditCash $ 21,900Accounts Receivable 36,500Allowance for Uncollectible Accounts $ 3,100Inventory 30,000Land 61,600Accounts Payable 32,400Notes Payable (8%, due in 3 years) 30,000Common Stock 56,000Retained Earnings 28,500Totals $150,000 $150,000The $30,000 beginning balance of inventory consists of 300 units, each costing $100. DuringJanuary 2021, Big Blast Fireworks had the following inventory transactions:January 3 Purchase 1,200 units for $126,000 on account ($105 each).January 8 Purchase 1,300 units for $143,000 on account ($110 each).January 12 Purchase 1,400 units for $161,000 on account ($115 each).January 15 Return 100 of the units purchased on January 12 because of defects.January 19 Sell 4,000 units on account for $600,000. The cost of the units sold is determined using a FIFO perpetual inventory system.January 22 Receive $580,000 from customers on accounts receivable.January 24 Pay $410,000 to inventory suppliers on accounts payable.January 27 Write off accounts receivable as uncollectible, $2,500.January 31 Pay cash for salaries during January, $128,000.Required:1. Record each of the transactions listed above, assuming a FIFO perpetual inventory system.2. Record adjusting entries on January 31.a. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.b. At the end of January, $4,000 of accounts receivable are past due, and the company estimates that 40% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 4% will not be collected.c. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.d. Accrued income taxes at the end of January are $12,300.3. Prepare an adjusted trial balance as of January 31, 2021, after updating beginning balances (above) for transactions during January (requirement 1) and adjusting entries at the end of January (requirement 2).4. Prepare a multiple-step income statement for the period ended January 31, 2021.5. Prepare a classified balance sheet as of January 31, 2021.6. Record closing entries.7. Analyze how well Big Blast Fireworks’ manages its inventory:a. Calculate the inventory turnover ratio for the month of January. If the industry average of the inventory turnover ratio for the month of January is 18.5 times, is the company managing its inventory more or less efficiently than other companies in the same industry?b. Calculate the gross profit ratio for the month of January. If the industry average gross profit ratio is 33%, is the company more or less profitable per dollar of sales than other companies in the same industry?c. Used together, what might the inventory turnover ratio and gross profit ratio suggest about Big Blast Fireworks’ business strategy? Is the company’s strategy to sell a higher volume of less expensive items or does the company appear to be selling a lower volume of more expensive items?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
On January 1, 2021, the general ledger of Big Blast Fireworks includes the following account balances:
Accounts Debit Credit
Cash $ 21,900
Allowance for Uncollectible Accounts $ 3,100
Inventory 30,000
Land 61,600
Accounts Payable 32,400
Notes Payable (8%, due in 3 years) 30,000
Common Stock 56,000
Retained Earnings 28,500
Totals $150,000 $150,000
The $30,000 beginning balance of inventory consists of 300 units, each costing $100. During
January 2021, Big Blast Fireworks had the following inventory transactions:
January 3 Purchase 1,200 units for $126,000 on account ($105 each).
January 8 Purchase 1,300 units for $143,000 on account ($110 each).
January 12 Purchase 1,400 units for $161,000 on account ($115 each).
January 15 Return 100 of the units purchased on January 12 because of defects.
January 19 Sell 4,000 units on account for $600,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January 22 Receive $580,000 from customers on accounts receivable.
January 24 Pay $410,000 to inventory suppliers on accounts payable.
January 27 Write off accounts receivable as uncollectible, $2,500.
January 31 Pay cash for salaries during January, $128,000.
Required:
1. Record each of the transactions listed above, assuming a FIFO perpetual inventory system.
2. Record
a. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.
b. At the end of January, $4,000 of accounts receivable are past due, and the company estimates that 40% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 4% will not be collected.
c. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.
d. Accrued income taxes at the end of January are $12,300.
3. Prepare an adjusted
4. Prepare a multiple-step income statement for the period ended January 31, 2021.
5. Prepare a classified balance sheet as of January 31, 2021.
6. Record closing entries.
7. Analyze how well Big Blast Fireworks’ manages its inventory:
a. Calculate the inventory turnover ratio for the month of January. If the industry average of the inventory turnover ratio for the month of January is 18.5 times, is the company managing its inventory more or less efficiently than other companies in the same industry?
b. Calculate the gross profit ratio for the month of January. If the industry average gross profit ratio is 33%, is the company more or less profitable per dollar of sales than other companies in the same industry?
c. Used together, what might the inventory turnover ratio and gross profit ratio suggest about Big Blast Fireworks’ business strategy? Is the company’s strategy to sell a higher volume of less expensive items or does the company appear to be selling a lower volume of more expensive items?
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