Chapter 08 Mastery (Mastery)

1. MP.08.01.ALGO

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   Mastery Problem: Receivables

   Fan-Tastic Sports Gear Inc.

   You have just been hired as the accountant for Fan-Tastic Sports Gear Inc., a wholesaler of sporting goods and apparel. The previous accountant left abruptly in late December, 20Y7, and an accounting intern has been drafting the journal entries since January. You are examining the accounting records before finalizing the journal entries for the first quarter of 20Y8. The following journal shows some of the accounts receivable transactions that you are reviewing.

   Journal
   Date	Description	Debit	Credit
   Jan. 17	Sales	9,800
   	Bad Debt Expense		9,800
   17	Bad Debt Expense	9,800
   	Accounts Receivable-CJs Sports Corp.		9,800
   21	Cash	10,700
   	Bad Debt Expense	2,200
   	Accounts Receivable-Four Seasons Sportswear Co.		12,900
   Feb. 15	Accounts Receivable-Healthy Running Inc.	3,000
   	Bad Debt Expense	500
   	Sales		3,500
   Mar. 4	Accounts Receivable-Four Seasons Sportswear Co.	2,200
   	Bad Debt Expense		2,200
   4	Cash	2,200
   	Bad Debt Expense		2,200
   13	Cash	5,540
   	Accounts Receivable-Barbs Best Gear		5,540
   31	Bad Debt Expense	20,870
   	Accounts Receivable-Healthy Running Inc.		5,250
   	Accounts Receivable-The Locker Room		4,100
   	Accounts Receivable-CJs Sports Corp.		2,780
   	Accounts Receivable-Get Your Gear Inc.		7,050
   	Accounts Receivable-Ready-2-Go		1,690

   Recording Uncollectable Receivables

   Review the accounts receivable transactions shown in the general journal on the Fan-Tastic Sports Gear Inc. panel.

   1. How does the company appear to be handling uncollectible receivables?

   direct write-off method

   2. You have made the following observations during your review of the accounting records. In deciding whether Fan-Tastic Sports Gear Inc. is handling uncollectible receivables appropriately, which of these observations are key factors in your decision?

   a. Most of the companys sales are on account.

   b. An analysis of the companys accounts receivable shows more accounts will be uncollectible than last year.

   c. Collection agencies are routinely used.

   d. Company sales last year were $3,000,000 and are expected to increase by $360,000 this year.

   e. Bad debt is a rising expense.

   f. The company sells primarily to smaller businesses, who are more likely to have cash flow problems.

   a, d

   3. After making the observations previously listed in (2), you have recommended that Fan-Tastic Sports Gear Inc. use the percent of sales method to record bad debt expense.

   Revised Journal Entries

   1. Assume that Fan-Tastic Sports Gear Inc. will be using the allowance method this year. Select the item from the following list that should be added to the existing chart of accounts.

   Allowance for Doubtful Accounts

   Feedback

   1. Review the different journal entries used in the allowance method.

   2. Finalize the journal entries shown on the Fan-Tastic Sports Gear Inc. panel and make any necessary changes. If an amount box does not require an entry, leave it blank.

   Jan. 17	Cash
   Jan. 21
   Feb. 15
   Mar. 4
   Mar. 4
   Mar. 13
   Mar. 31

   Feedback

   2. As you look at the original entries, think about the event that the transaction is attempting to record.

   Note Receivable

   In the trial balance for March, you see that Notes Receivable-Fast Feet Co. has a negative balance of $195, which would seem to indicate that Fast Feet paid too much. Looking back through the journal entries for March, you find that on March 19 the accounting intern recorded receipt of $5,070 in payment of this note receivable. Further investigation reveals that on November 19, 20Y7, this note receivable was received from Fast Feet Co. for $4,875. You can find no additional information about this note in the accounting records. Assume a 360 day year.

   Using the preceding information, compute the term and the interest rate of the note receivable from Fast Feet.

   1. Term of the note: days

   2. Interest rate of the note: %

   Feedback

   1. Use the equation for computing interest on a note but solve for the term. 2. Use the equation for computing interest on a note but solve for the interest rate.

   3. Journalize the entry needed to record information about the note receivable from Fast Feet for the year 20Y7. Assume that the entry on November 19, 20Y7 is correct. If an amount box does not require an entry, leave it blank. Round all amounts to the nearest dollar.

   Dec. 31	Interest Receivable
   	Interest Revenue

   Feedback

   3. How much interest was earned on this note in 20Y7?

   4. Journalize the entry needed to record collection of the note at maturity on March 19, 20Y8. Assume that the entry on November 19, 20Y7 is correct. If an amount box does not require an entry, leave it blank. Round all amounts to the nearest dollar.

   Mar. 19	Cash
   	Notes Receivable-Fast Feet Co.
   	Interest Receivable
   	Interest Revenue

   Feedback

   4. Remember to consider that the note was issued and collected at maturity in different years.

   Final Questions

   Fan-Tastic Sports Gear Inc. recorded $3,000,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 90% of sales were on account, with over 300 customer accounts. Bad debt expense was $26,187.

   1. Assume that Fan-Tastic Sports Gear Inc. used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,240. The company estimated uncollectible accounts expense using the percent of credit sales method and expected 0.75% of credit sales to be uncollectible. What is the amount of the adjusting entry to provide for doubtful accounts on December 31? Round all computations to the nearest dollar. $

   2. How much higher (lower) would Fan-Tastic Sports Gear Inc.s net income have been under the allowance method assumption previously shown in (1) than under the direct write-off method? (Enter 0 if there is no change.) by $

   3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement?