Hampton Company sells office equipment to small and medium-sized business. They
ID: 2446346 • Letter: H
Question
Hampton Company sells office equipment to small and medium-sized business. They had a very good year in 2012. They increased net sales from $ 4,000,000 in 2011 to $ 5,200,000 in 2012. In 2011, Hampton made $ 1,700,000 of their sales on credit, and had an A/R turnover of 3.6. In 2012, they made $ 2,900,000 of their sales on credit. In 2010, they implemented a new strategy that included selling to customers with weaker credit and extending payment terms on their receivables. Because of this increased risk, they required a larger number of new customers to sign written payment agreements, but they have not changed their estimates of uncollectible accounts since 2006. Below is an accounts receivable aging schedule for the end of 2011 and the end of 2012:
2011 Accounts Receivable Aging Schedule
Age Amount % Estimated Uncollectible
Under 30 days $ 975,000 3%
30-60 days $ 443,000 9%
60-90 days $ 98,000 20%
Over 90 days $ 45,000 50%
2012 Accounts Receivable Aging Schedule
Age Amount % Estimated Uncollectible
Under 30 days $ 1,700,000 3%
30-60 days $ 680,000 9%
60-90 days $ 127,000 20%
Over 90 days $ 51,000 50%
Hampton uses the percentage of receivables method to determine net realizable value of their receivables. During the course of 2012 they wrote-off $14,000 in receivables. Please answer the following questions:
A.Please record the journal entry to adjust Allowance for Doubtful Accounts at 12/31/12.
B.Please calculate the Accounts Receivable turnover as of 12/31/12.
C.If you were auditing Hampton Co, would you agree that their ending balance in the Allowance for Doubtful Accounts is acceptable? In paragraph form, please state your conclusion and give at least two reasons for your answer. If it is not appropriate, what should Hampton change?
Additionally, during the course of 2012, Hampton Company made sales to two new customers, who were starting new businesses. Hampton Company required them to sign the following notes:
1.On June 1, 2012, Zimmerman, Inc. purchased $85,000 of equipment. Zimmerman signed a note that required $ 10,000 down with the remainder due in 6 quarterly installments (due on Sept 1, Dec 1, Mar 1, June 1). The interest rate on the note is 13%.
2.On Oct 1, 2012, Mueller, Inc. purchased $57,000 of equipment. On that day, Mueller signed a 12-month, $65,000 zero-interest-bearing note. The implicit rate on the note is 14%.
With regards to these notes, please make the following journal entries for Hampton:
A.The journal entries to record the initial sale of equipment, receipt of cash, and note receivable for both notes.
B.Any payments made by Zimmerman or Mueller during the course of 2012.
C.Interest revenue accrued as of 12/31/12.
Explanation / Answer
If the Company makes less provision for the doubtful debts, it is giving overstating his accounts receivables which will end the company in paying the more taxes and it will effect his image in the long run
Answer A. Caclculation of Allowance of Doubtful Debts of 2012 : Age Amount % Estimated Estimated Uncollectible Uncollectible Under 30 days $1,700,000 3% 51000 30-60 days $680,000 9% 61200 60-90 days $127,000 20% 25400 Over 90 days $51,000 50% 25500 Total Amount 163100 Amount Written Off : $ 14000 Extra Provision to be made = $163100 - $14000 = $149100 Journal Entry will be: Bad debts A/c Dr. $149,100 To Provision for Dountful debts $149,100 (For extra provision) Answer B. Accounts Receivable Turnover Ratio = Net Credit Sales / Avg. Accounts Receivables Net Credit Sales for 2012 = $2900000 Accounts Receivables in 2011 = $1561000 Accounts Receivables in 2012 = $2558000 Avg. Accounts Receivables = (1561000 + 2558000)/2 = $2059500 Accounts Receivable Turnover Ratio = $2900000 / 2059500 = 1.41 times Answer C. We did not agree with the Hampton Co. ending balance in the in the allowance of the Doubtfull Debts as $14000, since the estimmated doubtful debts is $163100. The Company should make necessary changes in the recording the provision for doubtful debts and increse the provision for the doubtful debts to give the true picture to the investors and govt.If the Company makes less provision for the doubtful debts, it is giving overstating his accounts receivables which will end the company in paying the more taxes and it will effect his image in the long run
Journal Entry June 1. Accounts Receivables A/c Dr. $85,000 To Sales A/c $85,000 (Sales Made to Zimmerman Inc.) June 1. 13% Note A/c Dr. $75,000 Cash A/c Dr. $10,000 To Accounts Receivable A/c $85,000 (Being the notes recd from Zimmerman Inc.) Sep 1. Cash A/c Dr. 14938 To 13% Note A/c 12500 To Interest A/c 2438 (Being the 1 st Installment Received from Zimmerman Inc) Dec 1. Cash A/c Dr. 14531 To 13% Note A/c 12500 To Interest A/c 2031 (Being the 2nd Installment Received from Zimmerman Inc) Dec 31. Accrued Int. Dr. 542 To Interest A/c 542 (Interest Accrued on note of Zimmerman Inc for One month) Oct 1. Accounts Receivables A/c Dr. $57,000 To Sales A/c $57,000 (Sales Made to Mueller Inc.) Oct 1. Note A/c Dr. $65,000 To Accounts Receivable A/c $57,000 To Interest A/c $8,000 (Being the Zero % Note given bt Muller Inc.) Dec 31. Interest A/c Dr. $5,333 To Accrued Interest A/c $5,333 (Being the Interest of the 8 moths are to be earned in next year so liabilty is created for the same)Related Questions
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