Stern Corporation (A)

On December 31, 2010, before the yearly financial statements were prepared, the controller of the Stem Corporation reviewed certain transactions that affected accounts receivable and the allowance for doubtful accounts. The controller first examined the December 31,2009, balance sheet (Exhibit 1 ). A subsequent review of the years transactions applicable to accounts receivable revealed the items listed below:

1. Sales on account during 2010 amounted to $9,965,575.
2. Payment received on accounts receivable during 2010 totalled $9,685,420.
3. During the year, accounts receivable totalling $26,854 were deemed uncollectible and were written off.
4. Two accounts that had been written off as uncollectible in 2009 were collected in 2010. One account for $2,108 was paid in full. A partial payment of $1,566 was made by the Hollowell Company on another account that originally had amounted to $2,486. The controller was reasonably sure this account would be paid in full because reliable reports were circulating that the trustee in bankruptcy for the Hollowell Company would pay all obligations 100 cents on the dollar.
5. The Allowance for Bad Debts was adjusted to equal 3 percent of the balance in Accounts Receivable at the end of the year.

EXHIBIT 1

STERN CORPORATION Balance Sheet As of December 31, 2009
Assets
Current assets:
Cash		$ 671,344
Accounts receivable	$ 988,257
Less: Allowance for doubtful accounts	29,648	958,609
U.S. Treasury securities at cost		274,060
		1,734,405
Inventories
Total current assets		3,638,418
Other assets:
Investments		412,294
		186,563
Land
Building	2,405,259
Less: Accumulated depreciation	663,379	1,741,880
Factory machinery	3,425,585
Less: Accumulated depreciation	1,642,358	1,783,227
Furniture and fixtures	56,484
Less: Accumulated depreciation	40,400	16,084
Automotive equipment	58,298
Less: Accumulated depreciation	37,156	21,142
Office machines	42,534
Less: Accumulated depreciation	28,005	14,529
		61,294
Tools
		56,250
Patent
Prepaid expenses		100,190
		$ 8,031,871
Total assets
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$ 510,000
Taxes payable		709,354
Accrued salaries, wages, and interest		141,478
Long-term debt, due within one year		69,300
Total current liabilities		1,430,132
Noncurrent liabilities.
Long-term debt		1,247,368
Shareholders' equity:
Common stock		2,503,275
Retained earnings		2,851,096
Total shareholders' equity		5,354,371
Total liabilities and shareholders' equity		$ 8,031,871

Questions

1. Analyze the effect of each of these transactions in terms of its effect on Accounts Receivable, Allowance for Doubtful Accounts, and any other account that may be involved, and prepare necessary journal entries.
2. Give the correct totals for Accounts Receivable and the Allowance for Doubtful Accounts as of December 31, 2010, after the transactions affecting them had been recorded.
3. Calculate the current ratio, acid-test ratio, and days receivables figures as of December 31,2010. Assume that amounts for items other than those described in the case are the same as on December 31, 2009.