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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 5-97 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT

While Front Row Entertainment has had considerable success in signing artists and promoting concerts, Cam and Anna still had a few ideas to grow their business that they wanted to implement. One idea that they both agree on is to start an online fan "community" for each of their artists. By providing a more direct connection between the artists and their fans, each artist community would serve as an online fan club that should generate increased interest and attendance at the artists' concerts. In addition to marketing and promoting the artist, Front Row Entertainment could sell advertising space on these fan communities to companies interested in reaching the particular demographic that the artist attracts. Because the summer concert season is one of the busiest and most lucrative times of the year, Cam and Anna felt it was extremely important to get the fan communities in place prior to the beginning of the summer. Therefore, they engaged in the following selected transactions for the months of May and June:

May 1 Paid Web Design Inc. S8,500 to develop the fan websites. The fan websites were operational on May 10. Front Row charged this expenditure to other expense.

10 Front Row Entertainment sold S550 worth of advertising to Little John’s Restaurant with terms 2/10, n/30. The advertising will randomly appear on the artists' websites throughout the month of May. Front Row expects Little John’s to pay within the discount period.

15 Front Row Entertainment sold S450 worth of advertising to Sherwood Media with terms 2/10, n/30. The advertising related to an in-store DVD promotion that Sherwood was holding later in the month. Front Row expects Sherwood Media to pay within the discount period.

19 Front Row Entertainment received payment from Little John for the May 10 bill.

20 Sherwood Media informed Front Row that an error had been made on its advertisement. Sherwood’s promotion was supposed to run from May 20 to May 25; however, the advertisement stated that the promotion would run from May 15 to May 25. Because the error was Front Row’s fault, Front Row agreed to reduce the amount owed by $150.

June 1 Front Row Entertainment sold S750 worth of advertising to Big House Entertainment Company with terms 2/10, n/30. The advertising will randomly appear on the artists' websites throughout the month of June. Front Row expect Big House to pay within the discount period.

10 Sherwood paid Front Row the amount owed for the May 15 bill minus the allowance granted on May 20.

20 Front Row learns that Big House Entertainment has filed for bankruptcy, and it writes off the receivable from June 1st.

Over the next few months, the fan communities continue to grow in popularity, with more and more companies purchasing advertising space. By the end of 2019, Front Row reports the following balances:

Chapter 5, Problem 97.2C, Case 5-97 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT While Front Row Entertainment has had

Required:

Prepare the adjusting entry required at December 31, 2019, with regard to bad debt under each of the following independent assumptions.

a. Assume that Front Row performed an aging of its accounts receivable. Front Row estimates that $895 of its accounts receivable will be uncollectible.

b. Assume that Front Row uses the percentage of credit sales method and estimates that 2% of credit sales will be uncollectible.

To determine

Concept introduction:

Receivables:

Companies generally make credit sales to improve their business and expand their customer base. When a credit sales is made the amount that the company has to receive from its customers is known as receivable. Usually company all the customers does not repay the amount they owe to the company and hence there are chances of some not repaying the amount and these are called as bad debts. The company usually estimates that a portion of its receivables will become bad debts and create provisions for the same. Therefore the bad debts for the year is adjusted by transferring the amount to allowance for bad debts account.

Aging Method of accounts receivables:

Under this method bad debts expenses are estimated by determining the age of the accounts receivable i.e. each accounts receivable are categorized by their age then the amount of default under each category is estimated based on experience and past history.

Percentage of Credit Sales Method:

Under this method bad debts are estimated as a percentage of credit sale. The percentage is estimated based on previous experience and past history.

Prepare adjusting entry for bad debts under the following assumptions. (a) Front Row has performed aging of accounts receivables and estimated that $895 of its accounts receivable will be uncollected. (b) Front row uses percentage of sales method and estimated 2% of credit sales will be uncollectible.

Explanation
  1. Aging of accounts receivable:
  2. To prepare the adjustment entry first we have to calculate the bad debts expense. Asper given information the allowance for doubtful debts accounts has a debit balance of 250 by the end of 2019 and Front Row has estimated $896 as accounts receivable for 2019. So let us now estimate the bad debts expense:

  3. Allowance for doubtful accounts

    Dr   Cr

  4. Accounts receivable estimate 895 Bad debts 645
    Ending Balance 250 ...

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