Q1. Record the following transactions for Cyrus Company. 1. On August 4, Cyrus s
ID: 2497799 • Letter: Q
Question
Q1. Record the following transactions for Cyrus Company. 1. On August 4, Cyrus sold merchandise on account to Swift Company for $700, terms 2/10, n/30. 2. On August 7, Cyrus granted Swift a sales allowance and reduced the cost of the merchandise by $50 because some of the goods were slightly damaged. 3. On August 12, Swift paid the account in full. Q2. Underwood Company’s ledger at the end of the current year shows Accounts Receivable of $150,000. Instructions a. b. If Allowance for Doubtful Accounts has a credit balance of $4,500 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for the end of the period. If Allowance for Doubtful Accounts has a debit balance of $4,500 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for the end of the period. Q3. honors the note on May 9. Record the collection of the note and interest by McGraw assuming that no interest has been accrued. On March 9, Hill gave McGraw Company a 60-day, 10% promissory note for $2,500. Hill Q4. On March 9, Hill gave McGraw Company a 60-day, 10% promissory note for $2,500. Hill dishonors the note on May 9. Record the entry that McGraw would make when the note is dishonored, assuming that no interest has been accrued.
Explanation / Answer
Q1 Journal entries of Cyrus Company
Date
Account Titles and Explanation
Debit
Credit
Aug 4
Swift Company A/c Dr.
$700
To Sales A/c
$700
(Sold goods to Swift Company terms 2/10, n/30)
Aug 7
Sales Returns and Allowance A/c Dr.
$50
To Swift Company A/c
$50
(Allowance for damaged goods)
Aug 12
Cash A/c Dr.
$637
Discount Given A/c Dr.
$ 13
To Swift Company A/c
$650
(Payment received from Swift company in full and discount given)
Cyrus Company sold goods on account on terms 2/10, net 30. That means, if the payment is done within 10 days, then 2% discount is given. Total credit period is 30 days. Sale was made on Aug 4th and the payment is received on Aug 12th. As it is within 10 days, 2% discount will be given to the Swift Company.
Sale value was $700 and Allowance for damaged goods is $50. So net receivable from Swift Company is $700 - $50 = $650. Discount of 2% on $650 will be $650 * 2% = $13. Cash received from Swift Company after discount will be $650 - $13 = $637.
Q2. Allowance for Doubtful debts is a provision made for the bad debts that would occur during the period. It can be a fixed amount or a percentage of Accounts Receivable. This will differ from one company to another and one industry to another.
Underwood Company estimates their bad debts will be 8% of Accounts Receivable. Every year Allowance for Doubtful debts need to be adjusted to 8% of Accounts Receivable. Underwood Company has Accounts Receivable of $150,000 at the end of the year. So Allowance for Doubtful Debts account should have balance of $150,000 * 8% = $12,000. As Allowance for Doubtful Debts is a provision, it should have credit balance.
a. Allowance for Doubtful Debts has a credit balance of $4,500. To increase the balance to $12,000, the account should be credited with the difference amount i.e. $12,000 - $4,500 = $7,500. Allowance for Doubtful Debts is a provision and in most cases we cannot relate to specific debtor. So the adjusting journal entry will be as follows:
Date
Account Titles and Explanation
Debit
Credit
Dec 31
Bad Debt A/c Dr.
$7,500
To Allowance for Doubtful Debts A/c
$7,500
(Adjustment for Allowance for Doubtful Debts)
b. Allowance for Doubtful Debts has a debit balance of $4,500. To increase the balance to $12,000, the account should be credited with the difference amount. As the balance should be changed from debit to credit, both the amounts to be added i.e. $12,000 + $4,500 = $16,500. So the adjusting journal entry will be as follows:
Date
Account Titles and Explanation
Debit
Credit
Dec 31
Bad Debt A/c Dr.
$16,500
To Allowance for Doubtful Debts A/c
$16,500
(Adjustment for Allowance for Doubtful Debts)
Q3. Hill gave McGraw Company a 60-day, 10% promissory note for $2,500. That means, $2,500 has to be paid back in 60 days and 10% p.a. interest also to be paid. Promissory Note has been given on March 9th and it is honored on May 9th after completion of 60 days. The interest to be paid on Promissory Note will be as follows:
$2,500 * (10%/365*60) = $2,500 * 1.64% = $41. (Note: Interest percentage is rounded off to 2 decimals)
Interest is not accrued for the period. So the journal entry to record honoring the note will be as follows:
Date
Account Titles and Explanation
Debit
Credit
May 9
Cash A/c Dr.
$2,541
To Interest Income A/c
$ 41
To Promissory Note A/c
$2,500
(Collection of Promissory Note and Interest)
Q4. As Interest is not accrued, no entry is required for interest when the Promissory Note is dishonored. The journal entry on May 9th will be as follows:
Date
Account Titles and Explanation
Debit
Credit
May 9
Bad Debts A/c Dr.
$2,500
To Promissory Note A/c
$2,500
(Dishonor of the Promissory Note)
Date
Account Titles and Explanation
Debit
Credit
Aug 4
Swift Company A/c Dr.
$700
To Sales A/c
$700
(Sold goods to Swift Company terms 2/10, n/30)
Aug 7
Sales Returns and Allowance A/c Dr.
$50
To Swift Company A/c
$50
(Allowance for damaged goods)
Aug 12
Cash A/c Dr.
$637
Discount Given A/c Dr.
$ 13
To Swift Company A/c
$650
(Payment received from Swift company in full and discount given)
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