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Brief Exercise 7-1 Accounting for Bad Debts Radger recorded $500,000 of net sales for the year of which 2% is estimated to be uncollcctible Identify and analyze the adjustment required .at the end of the year to record bad debts. Brief Exercise 7-3 Accounting for Notes Receivable On November 1, 2012, Gopher received a $50,000, 6%, 90 day promissory note. Identify' and analyse the adjustment required an December 31, die endoi die company's fiscal year. Hint: Both 7-1 and 7-3 are simple exercises, but be sure to show your work and explain the adjustment clearly. Exercise 9-2 Current Liabilities The following items represent liabilities on a firm's balance sheet: a. An amount of money owed to a supplier based on die terms 2/20, n/40, tor which no note was cxccuicd. b. An amount of money owed to a creditor on a note due April 30, 2013. c. An amount of money owed to a creditor on a note due August 15, 2014. d. An amount of money owed to employees for work performed during the last week in Decern bcr. e. An amount of money owed to a bank for the use of borrowed funds due on March 1, 2013. f. An amount of money owed to a creditor as an annual installment payment on a ten-year note. g An amount of money owed to the federal government based on rhc company's annual income. Required 1. For each item, state whether it should be classified as a current liability on the December 31, 2012, balance sheet. Assume that the operating cycle is shorter than one year. If the item should not be classified as a current liability, indicate where on die balance sheet it sliould be presented. For each item identified as a currcnt liability in pari (1), state :he account title that is nor mally used to report the item on the balance sheet Why would an investor or a creditor be interested in whcihci an item ts a current or a longterm liability? Hint: The dates are very important in determining whether a liability is current or long-term so be sure to read each date carefully. Exercise 9-5 Current Liabilities and Ratios Several accounts lluit appeared on Kruse's 2012 balance sheet are as follows Required Prepare the Current Liabilities section of Kruse's 2012 balance slieet. Compute Kruse's working capital. Compute Kruse 's ciirrcnt ratio. What does this ratio indicate about Kruse's condition? Hint: Remember, even if it is only a partial balance sheet the statement needs a proper heading. With each item, determine if it is a current liability. Show the numbers you use in determining the current ratio, not just the ratio.Explanation / Answer
I.
$500,000x2%= $10,000 in uncollectible debt.
The accounts that will be affected include the Allowance for doubtful Accounts and the Bad Debts Expense. Both will increase by $10,000.
The statements that will be affected include the Balance sheet and the Income sheet.
Balance Sheet
Assets | + | Liabilities | = | S.H. Equity |
A.D.A($10,000) | | | | ($10,000) |
Income Statement
Revenues | - | Expenses | = | Net Income |
| | B.D.$10,000 | | ($10,000) |
So accounts receivable minus doubtful accounts gives us the Net Accounts receivable.
II.
$50,000 x .06 x 90/360= $750, which is due on maturity
Notes receivable and Sales revenue are both affected, with an increase in each of $50,000.
The Balance Sheet and Income statement are have reflections
Balance Sheet
Assets | + | Liabilities | = | S.H. Equity |
Notes Receivable $50,000 | | | | $50,000 |
Income Statement
Revenues | - | Expenses | = | Net Income |
Sales rev $50,000 | | | | $50,000 |
$50,000 x .06 x 60/360= $500 Interest owed on Dec, 31
Interest Receivable and Interest Revenue both increase by $500, and will be reflected on the Balance sheet and Income statement.
Assets | + | Liabilities | = | S.H. Equity |
Interest Receivable $500 | | | | $500 |
Income Statement
Revenues | - | Expenses | = | Net Income |
Interest rev $500 | | | | $500 |
The working capital ratio is calculated as:
Working Capital = Current Assets - Current Liabilities
also called net current assets or current capital.
Working Capital = (40,000+180000-20000+15000+85000) - (55000+20000+10000+15000) = $325,000
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