Mini-Project #4 Receivables STUDENT ROLE: You are employed with Johnson Accounting Firm as an entry-level accountant, and are about to complete your first year of employment. Today you have been assigned a new client Baby Couture, Inc. CLIENT PROFILE: Baby Couture, Inc. is a local manufacturer of clothing and accessories for children, and has been in business since 2014. They serve newborns through 6 year olds. Baby Couture does not operate any of its own retail stores, but instead sells directly to retail stores throughout the Midwest. Baby Coutures clients include smaller, locally owned stores, as well as larger national retail chains. Your employer (Johnson Accounting Firm) has been providing accounting services to Baby Couture, Inc. since it started business in 2014, providing monthly compilations on an accrual basis. Although Baby Couture has experienced an increase in overall sales, it is experiencing a decline in cash collections and suspects it might need to modify its credit policy. Currently, Baby Couture offers all customers credit terms of 1/20, net 30. And, it does not charge interest for customers who pay after 30 days. ASSIGNMENT: Your supervisor has assigned you four separate tasks, all designed to give Baby Couture additional insight into its credit policy and financial reporting of bad debt. The documents needed for this task are all linked in the Mini-Project #4 Blackboard folder. Task 1: Using the trial balance available in Blackboard, journalize year-end bad debts using the Percentage of Sales method, assuming that 18% of net sales are uncollectible. Using the account balances provided in Blackboard, prepare an Adjusted Trial Balance for December 31, 2016, and prepare an Income Statement, Retained Earnings Statement and Balance Sheet. Task 2: Using the trial balance available in Blackboard, journalize year-end bad debts using the Percentage of Receivables method, assuming that 22% of accounts receivable are uncollectible. Using the account balances provided in Blackboard, prepare an Adjusted Trial Balance for December 31, 2016, and prepare an Income Statement, Retained Earnings Statement and Balance Sheet. Task 3: Blackboard provides a template of an Aging Schedule. Complete the Aging Schedule for Baby Couture, Inc. and journalize year-end bad debts. Using the account balances provided in Blackboard, prepare an Adjusted Trial Balance for December 31, 2016, and prepare an Income Statement, Retained Earnings Statement and Balance Sheet. Task 4: Prepare a memo, in proper format (see Blackboard example), to your supervisor (Sally Sampson) that addresses the following topics: (a) The goal is to help Baby Couture identify a method that provides the most accurate representation of Accounts Receivable (at net realizable value), on the Balance Sheet. Analyze Baby Coutures financials and explain how the three approaches (from Tasks 1-3) to bad debt expense have different impacts on Baby Coutures Income Statement and Balance Sheet. Make a recommendation for which method Baby Couture should use in order to provide the most accurate valuation for Accounts Receivable, and explain why you chose this method. (b) Review the data provided by the Aging Schedule and analyze the effectiveness of Baby Coutures credit policy. Remember, their credit policy allows all customers to purchase goods on credit, with terms 1/20, net 30. And, customers who pay after 30 days are not required to pay interest. If the credit policy is effective, explain why you think so. If the credit policy is not effective, explain what options Baby Couture, Inc. has for improving credit collections and why their existing credit policy is hurting liquidity.

BABY COUTURE, INC.
Adjusted Trial Balance
December 31, 2016
	Debit		Credit
CASH	$ 120,000
ACCOUNTS RECEIVABLE	450,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS			$ 72,000
INVENTORY	70,000
PREPAID ADVERTISING	500
SUPPLIES	14,200
EQUIPMENT	100,000
ACCUMULATED DEPRECIATION-EQUIPMENT			24,390
ACCOUNTS PAYABLE			3,000
NOTES PAYABLE			8,000
UNEARNED REVENUE			500
INTEREST PAYABLE			100
SALARIES AND WAGES PAYABLE			1,600
UTILITIES PAYABLE			120
COMMON STOCK			20,000
PAID IN CAPITAL IN EXCESS OF PAR			8,000
RETAINED EARNINGS			472,000
DIVIDENDS	5,000
SALES REVENUE			275,000
COST OF GOODS SOLD	85,000
RENT EXPENSE	8,800
INSURANCE EXPENSE	1,200
INTEREST EXPENSE	1,100
SALARIES AND WAGES EXPENSE	17,600
SUPPLIES EXPENSE	2,900
UTILITIES EXPENSE	1,440
DEPRECIATION EXPENSE	670
PHONE/INTERNET EXPENSE	1,300
ADVERTISING EXPENSE	5,000
	$ 884,710		$ 884,710

BABY COUTURE, INC.
Adjusted Trial Balance
December 31, 2016
	Debit		Credit
CASH	$ 120,000
ACCOUNTS RECEIVABLE	450,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS			$ 72,000
INVENTORY	70,000
PREPAID ADVERTISING	500
SUPPLIES	14,200
EQUIPMENT	100,000
ACCUMULATED DEPRECIATION-EQUIPMENT			24,390
ACCOUNTS PAYABLE			3,000
NOTES PAYABLE			8,000
UNEARNED REVENUE			500
INTEREST PAYABLE			100
SALARIES AND WAGES PAYABLE			1,600
UTILITIES PAYABLE			120
COMMON STOCK			20,000
PAID IN CAPITAL IN EXCESS OF PAR			8,000
RETAINED EARNINGS			472,000
DIVIDENDS	5,000
SALES REVENUE			275,000
COST OF GOODS SOLD	85,000
RENT EXPENSE	8,800
INSURANCE EXPENSE	1,200
INTEREST EXPENSE	1,100
SALARIES AND WAGES EXPENSE	17,600
SUPPLIES EXPENSE	2,900
UTILITIES EXPENSE	1,440
DEPRECIATION EXPENSE	670
PHONE/INTERNET EXPENSE	1,300
ADVERTISING EXPENSE	5,000
	$ 884,710		$ 884,710

BABY COUTURE, INC.
Aging Schedule
Name of Customers	Balance	Under	30-60	61-90	91-120	Over 120
	Dec. 31	30 days	days	days	days	days
Bun in the Oven	$ 32,000		$ 10,000	$ 8,000	$ 14,000
Wholesaler, Inc	60,000	$ 15,000	22,000	23,000
Budle of Joy, Inc.	58,000				32,000	$ 26,000
Babyland, Inc.	22,000			9,000	1,500	11,500
TOTAL	$ 172,000	$ 15,000	?	?	?	?
		Percentage
		Estimated	Required
		to be	Balance in
Age	Amount	Uncollectible	Allowance
Under 30 days	$ 15,000	5%	$ 750
30-60 days	?	25%	?
61-90 days	?	45%	?
91-120 days	?	75%	?
Over 120 days	?	98%	?
Year-end balance in Allowance for Doubtful Accounts			?