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You have just been hired as the accountant for Fan-Tastic Sports Gear, a wholesaler of sporting goods and apparel. The previous accountant left abruptly, and

You have just been hired as the accountant for Fan-Tastic Sports Gear, a wholesaler of sporting goods and apparel. The previous accountant left abruptly, 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. Below are some accounts receivable transactions that you are reviewing.

PAGE 11

JOURNAL

DATE DESCRIPTION POST. REF. DEBIT CREDIT

1

Jan. 17

Sales

9,700.00

2

Bad Debt Expense

9,700.00

3

17

Bad Debt Expense

9,700.00

4

Accounts Receivable-CJs Sports

9,700.00

5

21

Cash

10,700.00

6

Bad Debt Expense

2,200.00

7

Accounts Receivable-Four Seasons Sportswear

12,900.00

8

Feb. 15

Accounts Receivable-Healthy Running

3,000.00

9

Bad Debt Expense

500.00

10

Sales

3,500.00

11

Mar. 4

Accounts Receivable-Four Seasons Sportswear

2,200.00

12

Bad Debt Expense

2,200.00

13

4

Cash

2,200.00

14

Bad Debt Expense

2,200.00

15

13

Cash

5,540.00

16

Accounts Receivable-Barbs Best Gear

5,540.00

17

31

Bad Debt Expense

20,870.00

18

Accounts Receivable-Healthy Running

5,250.00

19

Accounts Receivable-The Locker Room

4,100.00

20

Accounts Receivable-CJs Sports

2,780.00

21

Accounts Receivable-Get Your Gear

7,050.00

22

Accounts Receivable-Ready-2-Go

1,690.00

CHART OF ACCOUNTS

Fan-Tastic Sports Gear
General Ledger
ASSETS
110 Cash
111 Petty Cash
121 Accounts Receivable-Healthy Running
122 Accounts Receivable-The Locker Room
123 Accounts Receivable-CJs Sports
124 Accounts Receivable-Get Your Gear
125 Accounts Receivable-Four Seasons Sportswear
126 Accounts Receivable-Ready-2-Go
127 Accounts Receivable-Barbs Best Gear
131 Interest Receivable
132 Notes Receivable
141 Merchandise Inventory
145 Office Supplies
151 Prepaid Insurance
181 Land
193 Office Equipment
194 Accumulated Depreciation-Office Equipment
LIABILITIES
210 Accounts Payable
211 Salaries Payable
213 Sales Tax Payable
214 Interest Payable
215 Notes Payable
EQUITY
310 Rama Gupta, Capital
311 Rama Gupta, Drawing
312 Income Summary
REVENUE
410 Sales
610 Interest Revenue
EXPENSES
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
523 Delivery Expense
524 Repairs Expense
529 Selling Expenses
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense-Office Equipment
533 Insurance Expense
534 Office Supplies Expense
536 Credit Card Expense
537 Cash Short and Over
538 Bad Debt Expense
539 Miscellaneous Expense
710 Interest Expense

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

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

a. aging of accounts receivable method

b. allowance method

c. direct write-off method

d. percent of sales method

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

a. Most of the companys sales are on account.

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

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

d. Bad debt is a rising expense.

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

f. Collection agencies are routinely used.

3. After making the observations listed in (2) above, you have recommended that Fan-Tastic Sports Gear use the ____? to record bad debt expense.

1. Assume that Fan-Tastic Sports Gear will be using the allowance method this year. Select any items(s) from the list below that should be added to the existing chart of accounts. Check all that apply.

a. Balance of Aging Accounts

b. Estimate for Uncollectible Accounts

c. Total Credit Sales

d. Net Realizable Value of Receivables

e. Allowance for Doubtful Accounts

2. Finalize the journal entries shown on the Fan-Tastic Sports Gear panel and make any necessary changes. Refer to the Chart of Accounts for the exact wording of account titles. You may also use any items from the list above, if needed.

PAGE 11

JOURNAL

DATE DESCRIPTION POST. REF. DEBIT CREDIT

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

Fan-Tastic Sports Gear recorded $3,000,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 80% of sales were on account, with over 300 customer accounts. Bad debt expense was $26,187.

1. Assume that Fan-Tastic Sports Gear used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,190. 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 calculations to the nearest dollar.
2. How much higher (lower) would Fan-Tastic Sports Gears net income have been under the allowance method assumption in (1) above than under the direct write-off method? ____ ? by ____?
3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement? _____?

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