Modern Kitchens Inc. (MKI) is a Montral-based company that sells imported fancy kitchenware to retailers. Selected account

Modern Kitchens Inc. (MKI) is a Montréal-based company that sells imported fancy kitchenware to retailers. Selected account balances as at September 30, 2011, are shown below.

During October 2011, the following transactions occurred:

a. The company sold merchandise on account to various retailers for a total amount of \(\$ 76,000\), terms \(2 / 10, n / 30\). A few retailers who purchased merchandise for a gross amount of \(\$ 40,000\) paid the amount due within 10 days. A total of \(\$ 16,000\) of the October sales remained unpaid at October 31, 2011.

b. Customers paid the company \(\$ 50,000\) for merchandise they purchased prior to September 30 , 2011. These customers did not pay within the discount period.

c. Two of MKI's customers owed the company a total of \(\$ 5,000\) and were facing financial difficulties during October due to increased competition. They were forced to close their businesses before the end October 2011. MKI does not expect to receive any money from these two customers and considered their accounts uncollectible.

d. The company received new kitchenware from a Korean supplier, Kim \& Sons Ltd., for \(\$ 40,000\). The invoice indicated that the supplier would allow a cash disccunt of 1 percent if the invoice were paid before the end of October 2011. MKI paid the supplier on November 10, 2011.
MKI estimates that 4 percent of its trade receivables at October 31, 2011 will not be collected in the future.

Required:
1. Prepare the journal entries to record the transactions that occurred in October 2011, and any related adjusting journal entries at October 31, 2011, the end of MKI's fiscal year.
2. Show how the information related to trade receivables is presented on the company's statement of financial position at October 31, 2011.
3. The major shareholder of MKI, Michel Beauregard, was reading through the company's statement of financial position and noticed the account allowance for doubtful accounts. He called Carol, MKI's accountant, and made the following statement: "Carol, I don't think we need to make a provision for doubfful accounts as it will reduce the amount of trade receivables unnecessarily. I think we should wait until we are certain that we cannot collect from our customers before showing a reduction in the trade receivables on the statement of financial position. This way, the trade receivables balance will be more accurate. I would like you to make the necessary change to the financial statements before they are distributed to the other shareholders." Assume the role of Carol and prepare a response to Mr. Beauregard.
4. MKI had an opportunity to get a loan from the Bank of International Trade (BiT) to pay the amount due to Kim \& Sons Ltd. The loan would have cost MKI \(\$ 300\) in interest charges. Should MKI have obtained the loan from BIT to pay its debt to Kim \& Sons Ltd. before October 31, 2011?

Transcribed Image Text:

Debit Credit Trade receivables $119,000 Allowance for doubtful accounts $3,000