Chapter 5, Problem 5.21E

Compare the accounting cycle using receivable transactions (LO5–1, 5–3, 5–4, 5–5, 5–6, 5–7, 5–8)

On January 1, 2018, the general ledger of 3D Family Fireworks includes the following account balances:

Accounts	Debit	Credit
Cash	$ 23.900
Accounts Receivable	13.600
Allowance for Uncollectible Accounts		$ 1.400
Supplies	2.500
Notes Receivable (6%. due in 2 years)	20.000
Land	77.000
Accounts Payable		7.200
Common Stock		96.000
Retained Earnings		32,400
Totals	$137,000	$137,000

During January 2018, the following transactions occur.

January 2    Provide services to customers for cash. $35,100.

January 6    Provide services to customers on account, $72,400.

January 15    Write off accounts receivable as uncollectible, $1,000.

January 20    Pay cash for salaries, $31,400.

January 22    Receive cash on accounts receivable, $70,000.

January 25    Pay cash on accounts payable, $5,500.

January 30    Pay 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?

To determine

To record: Each of the transactions of Fireworks 3D.

Explanation of Solution

Date	Account Title and Explanation		Debit ($)	Credit ($)
January 2	Cash		35,100
		Service revenue		35,100
	(To record the service  provided for cash)
January 6	Accounts receivable		72,400
		Service Revenue		72,400
	(To record the services provided on account )
January 15	Allowance for uncollectible accounts		1,000
		Accounts receivable		1,000
	(To record the writing-off uncollectible accounts)
January 20	Salaries expense		31,400
		Cash		31,400
	(To record receipt of cash for salaries )
January 22	Cash		70,000
		Accounts receivable		70,000
	(To record receipt of cash on account)
January  25	Accounts payable		5,500
		Cash		5,500
	(To record paying cash on account)
January 30	Utilities expense		13,700
		Cash		13,700
	(To record utilities expenses paid)

Table (1)

To determine

To record: Adjusting entry at the end of January for Allowance for uncollectible accounts.

Answer to Problem 5.21E

Journal entry for adjustment of Allowance for uncollectible accounts:

Date	Particulars		Debit	Credit
January 31	Bad debt Expense (1)		1,100
		Allowance for uncollectible accounts		1,100
	(To record adjustment of allowance for uncollectible accounts)

Table (2)

Explanation of Solution

• Bad debt expense is a component of stockholders’ equity and decreased it. So, debit bad debt expense for $1,100 and,
• Allowance for uncollectible accounts is a contra asset account and decreased it. So, credit allowance for uncollectible accounts for $1,100.

Working notes:

Calculation of Allowance for uncollectible accounts:

$\begin{array}{c}\text{Allowance for uncollectible accounts=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Accounts receivable}\times \\ \text{Percentage of estimation }\\ \text{which will not be collected}\end{array}\right)+\\ \left(\begin{array}{l}\text{Remaining accounts receivable(2) }\times \\ \text{Percentage of estimation }\\ \text{which will not be collected}\end{array}\right)-\\ \text{Estimation of uncollectible accounts(3)}\end{array}\right]\\ =\left[\left(\$5,000\times 20\%\right)+\left(\$10,000\text{(2)}\times 5\%\right)-\$400\text{(3)}\right]\\ =\left[\left(\$1,000\right)+\left(500\right)-400\right]\\ =\$1,100\end{array}$ (1)

Calculation of remaining accounts receivable:

$\begin{array}{c}\text{Remaining accounts receivable=}\left[\begin{array}{l}\text{Accounts rceivable+Services provided on account}-\\ \mathrm{Re}\text{ceived cash on accounts receivable}-\\ \text{Writting of accounts receivable as uncollectible}-\\ \text{Accounts receivable past dues}\end{array}\right]\\ =\left[\$13,600+\$72,400-\$70,000-\$1,000-\$5,000\right]\\ =\$10,000\end{array}$ (2)

Calculation for estimation of uncollectible accounts:

$\begin{array}{c}\text{Estimation of uncollectible accounts=}\left[\begin{array}{l}\text{Allowance for uncollectible accounts(credit)}-\\ \text{Writting off accounts receivable as uncollectible}\end{array}\right]\\ =\left[\$1,400-\$1,000\right]\\ =\$400\end{array}$ (3)

To determine

To record: Adjustment of supplies expenses account.

Answer to Problem 5.21E

Journal entry for adjustment of supplies expenses account;

Date	Particulars		Debit	Credit
January 31	Supplies Expense (4)		1,800
		Supplies		1,800
	(To record adjustment of supplies expense accounts)

Table (3)

Explanation of Solution

• A supplies expense is an expense which is a component of stock holders equity and it decreases. Hence, debit the supplies expenses account with $1,800.
• A supply is an asset and it decreases. Hence, credit the supplies account with $1,800.

Working notes:

Calculation of adjustment for supplies:

$\begin{array}{c}\text{Supplies=Supplies at the beginning of the year}-\text{Supplies at the end of the year}\\ \text{=\$2,500}-\$700\\ =\$1,800\end{array}$ (4)

To determine

To record: The adjustment of interest receivable.

Answer to Problem 5.21E

Date	Account Title and Explanation		Debit ($)	Credit ($)
January  31	Interest receivable (5)		100
		Interest revenue		100
	(To record adjustment for accrued interest)

Table (4)

Explanation of Solution

For Adjustment of interest revenue on January 31:

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

Working notes:

Calculation of adjustment of interest revenue:

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$20,000\times 6\%\times \frac{1}{12}\\ =\$100\end{array}$ (5)

To determine

To record: Adjustment of unpaid salaries.

Answer to Problem 5.21E

Journal entry for adjustment of unpaid salaries account;

Date	Particulars		Debit	Credit
January 31	Salaries Expense (4)		33,500
		Salaries payable		33,500
	(To record adjustment of salaries payable accounts)

Table (5)

Explanation of Solution

For Adjustment of Unpaid salaries on January 31:

• Salaries expense is a expense which is a component of stock holders’ equity and it decreases. Hence, debit the salaries expenses account.
• Salaries payable is a liability and it increases. Hence, credit the salaries payable account.

To determine

To Prepare:  An adjusted trial balance as of January 31, 2018, after updating beginning balances for transactions during January in the requirement 1 and adjusting entries at the end of January in the requirement 2.

Answer to Problem 5.21E

Fireworks 3D
Adjusted Trial Balance as of
For the year January 31, 2018
Accounts	Debit ($)	Credit ($)
Cash(6)	$78,400
Accounts Receivable(7)	15,000
Interest Receivable(8)	100
Supplies(9)	700
Notes Receivable(10)	20,000
Land(11)	77,000
Allowance for Uncollectible Accounts(12)		$1,500
Accounts Payable(13)		1,700
Salaries Payable(14)		33,500
Common Stock(15)		96,000
Retained Earnings(16)		32,400
Service Revenue(17)		107,500
Interest Revenue(18)		100
Supplies Expense(19)	1,800
Salaries Expense(20)	64,900
Utilities Expense(21)	13,700
Bad Debt Expense(22)	1,100
Total	$272,700	$272,70

Table (6)

Explanation of Solution

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

Working notes:

$\begin{array}{c}\text{Ending cash balance=}\left[\begin{array}{l}\text{Beginning cash balance +}\\ \text{Services on cash+}\\ \text{Received cash on accounts receivable}-\\ \text{Salaries paid in cash}-\\ \text{accounts payable paid in cash}-\\ \text{utilities paid in cash}\end{array}\right]\\ =\left[\$23,900+\$35,100+\$70,000-\$31,400-\$5,500-\$13,700\right]\\ =\$78400\end{array}$ (6)

$\begin{array}{c}\text{Ending accounts receivable=}\left[\begin{array}{l}\text{Beginning accounts receivable +}\\ \text{Providing services on account}-\\ \text{Writing off accounts receivable as uncollectible}-\\ \text{Cash received on accounts receivable}\end{array}\right]\\ =\left[\$13,600+\$72,400-\$1,000-\$70,000\right]\\ =\$15,000\end{array}$ (7)

$\begin{array}{l}\text{Interest receivables incurred at the end of the accounting year is \$100}\\ \end{array}$ (8)

$\begin{array}{c}\text{Ending supplies balance=}\left[\begin{array}{l}\text{Beginning balance}-\\ \text{Supplies incurred at the}\\ \text{ end of the accounting year}\end{array}\right]\\ \text{=\$2,500}-\$1,800\\ =\$700\end{array}$ (9)

$\text{Notes receivable at the beginning is \$20,000 }$ (10)

$\text{Land at the beginning is \$77,000}$ (11)

$\begin{array}{c}\left[\begin{array}{l}\text{Ending allowance }\\ \text{for uncollectible accounts}\end{array}\right]\text{=}\left[\begin{array}{l}\text{Beginning balance }-\\ \text{Write-off accounts receivable as uncollectible+}\\ \text{Allowance for uncollectible accounts }\\ \text{incurred at the end of the accounting year}\end{array}\right]\\ =\$1,400-\$1,000+\$1,100\\ =\$1,500\end{array}$ (12)

$\begin{array}{c}\text{Ending accounts payable=Beginning balance}-\text{Paid cash on accounts payable}\\ \text{=\$7,200}-\$5,500\\ =\$1,700\end{array}$ (13)

$\text{Salaries payable incurred at the end of the accounting year is \$33,500}$ (14)

$\text{Common stock at the beginning is \$96,000}$ (15)

$\text{Retained earnings at the beginning is \$32,400}$ (16)

$\begin{array}{c}\text{Ending service revenue=Services provided on cash+Services provided on account}\\ \text{=\$35,100+\$72,400}\\ \text{=\$107,500}\end{array}$ (17)

$\text{Interest revenue incurred at the end of the accounting year is \$100}$ (18)

$\text{Supplies expenses incurred at the end of the accounting year is \$1,800}$ (19)

$\begin{array}{c}\text{Ending salaries expenses=}\left[\begin{array}{l}\text{Paid cash for salaries+}\\ \text{Salaries incurred at the}\\ \text{ end of accounting year}\end{array}\right]\\ \text{=\$31,400+\$33,500}\\ =\$64,900\end{array}$ (20)

$\text{Utilities expenses incurred during january is \$13,700}$ (21)

$\text{Bad debt expense incurred at the end of accounting year is \$1,100}$ (22)

To determine

To Prepare: An income statement for the period ended January 31, 2018 of Fireworks 3D.

Explanation of Solution

Fireworks 3D
Income statement
For the year ended January 31, 2018
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	$107,500
Interest revenue	100
Total revenues		107,600
Expenses:
Supplies expense	1,800
Salaries expense	64,900
Utilities expense	13,700
Bad debt expense	1,100
Total expenses		81,500
Net income		$26,100

Table (7)

To determine

To Prepare:A classified balance sheet as of January 31, 2018.

Answer to Problem 5.21E

Fireworks 3D
Balance sheet
January 31, 2018
Assets	Amount ($)	Liabilities	Amount ($)
Cash	$78,400	Accounts payable	$1,700
Accounts receivable	$15,000	Salaries payable	33,500
Less: Allowance	(1,500)	Total current liabilities	35,200
Net accounts receivable	13,500
Interest receivable	100
Supplies	700
Total current assets	92,700	Stockholders’ Equity
		Common stock	96,000
Notes receivable	20,000	Retained earnings (23)	58,500
Land	77,000	Total stockholders’ equity	154,500
Total assets	$189,700	Total liabilities and stockholders’ equity	$189,700

Table (8)

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Working notes:

$\begin{array}{c}\text{Retained earnings=Beginning retained earnings+Net income}-\text{Dividends}\\ \text{=\$32,400+\$26,100}-\$0\\ =\$58,500\end{array}$ (23)

To determine

To record: Closing entries of Fireworks 3D.

Answer to Problem 5.21E

Journal entry for closing revenue accounts of Fireworks 3D:

Date	Particulars		Debit	Credit
January 31, 2018	Service Revenue		107,500
	Interest Revenue		100
		Retained Earnings		107,600
	(To record closing of revenue accounts)

Table (9)

Journal entry for closing expense accounts of Fireworks 3D:

Date	Particulars		Debit ($)	Credit ($)
January 31, 2018	Retained Earnings		81,500
		Supplies expense		1,800
		Salaries expense		64,900
		Utilities expense		13,700
		Bad debt expense		1,100
	(To record closing of expense accounts)

Table (10)

Explanation of Solution

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

For closing revenue accounts of fireworks 3D:

• Service revenue is a component of stock holders’ equity and decreased it. So debit service revenue account.
• Interest revenue is a component of stock holders’ equity and decreased it.  So debit the interest revenue.
• Retained earnings are a liability and increased it. So credit the retained earnings.

For closing expense accounts of fireworks 3D:

• Retained earnings are a liability and decreased it. So debit the retained earnings.
• Supplies expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the supplies expense account.
• Salaries expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the salaries expense account.
• Utilities expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the utilities expense account.
• Bad debt expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the bad debt expense account.

To determine

To Calculate: The receivables turnover ratio for the month of January and if the industry average of the receivables turnover ratios for the month of January is 4.2 times and whether the company is collecting cash from customers more or less efficiently than other companies in the same industry.

Answer to Problem 5.21E

Determine the Receivables turnover ratio:

$\begin{array}{c}\text{Receivables turnover ratio=}\frac{\text{Net sales}}{\text{Average accounts receivable}}\\ \text{Fireworks 3D}=\frac{\$72,400}{\$14,300(24)}\\ =5.1\text{times}\\ \end{array}$

Explanation of Solution

Accounts receivable turnover ratio:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables and it indicates the number of times the average amount of net accounts receivables collected during a particular period

Higher receivables turnover ratio is preferable, since the more number of times the average amount of net accounts receivables collected during a particular period is better.

Average collection period:

Average collection period refers to the way to express the efficiency measure. Average collection period of receivables are measured in terms of days. It indicates the average number of days required for collecting invoiced amounts from the customers and it determines the effectiveness of the companies’ credit policies and collectable efforts and lower average collection period is preferable.

Working notes:

Determine the average accounts receivable:

$\begin{array}{c}\text{Average accounts receivable=}\left[\begin{array}{l}\text{Beginning accounts receivable +}\\ \text{ending accounts receivable}\end{array}\right]\\ \text{Fireworks 3D=}\frac{\text{\$13,600+\$15,000}}{2}\\ =\$14,300\\ \end{array}$ (24)

• A ratio of 5.1 gives that credit sales are about five times the average balance of accounts receivable.
• Fireworks 3D allow customers to purchase goods and services on account to boost companies revenues, Higher receivables turnover ratio is preferred typically because those credit sales also create a risk of the customer not paying.

Conclusion

Compared to the industry average receivables turnover ratio of 4.2 Fireworks 3D is collecting cash more efficiently from customers on credit sales.

To determine

To Calculate: The ratio of allowance for uncollectible accounts to accounts receivable at the end of January and based on a comparison of this ratio to the same ratio at the beginning of January, and to see whether the company expect an improvement or worsening in cash collections from customers on credit sales.

Answer to Problem 5.21E

Determine the ratio at the end of January:

$\begin{array}{c}\text{Ratio for allowance for uncollectible accounts=}\frac{\text{Allowance for uncollectible accounts}}{\text{Accounts receivable}}\\ =\frac{\$1,500}{\$15,000}\\ =10\%\end{array}$

Explanation of Solution

In comparison the ratio at the beginning of January was 10.3% where,

$\begin{array}{c}\text{Ratio for allowance for uncollectible accounts=}\frac{\text{Allowance for uncollectible accounts}}{\text{Accounts receivable}}\\ =\frac{\$1,400}{\$13,600}\\ =10.3\%\end{array}$

• The allowance is lower in relation to accounts receivable at the end of the month indicating the Fireworks 3D expects an improvement in cash collections from customers.