PROBLEM 77A Short Comprehensive Problem L 7-1 O, LO7.30, L 7-4 , L 7-5 g, LO7-60

Question

PROBLEM 77A Short Comprehensive Problem L 7-1 O, LO7.30, L 7-4 , L 7-5 g, LO7-60, LO7-70, LO7-8@ The Ski Factory provided the following information at December 31, year 1 B nk Reconciliatlon General ledger cash balance Bank statement balance 12/31/year1 Deposits in transit Outstanding checks $ 35,132 S 32,612 4,900 (2,712) 12/31/year 1 Bank service charge Returned customer checks (50) marked NSF Error in recording of office (750) supplies 468 Adjusted cash balance, 12/31/year 00 Adjusted cash balance, 12/31/year 1 $34800 Marketable Securities The company invested $52,000 in a portfolio of marketable securities on December 22, ycar 1. The portfolio's market value on December 31, ycar 1, had incrcased in valuc to $57,000 Notes Receivable On November 1, year 1, The Ski Factory sold 250 pairs of skis to Arctic Lodge for $130,000. The lodge paid $10,000 at the point of sale and issued a one-year, $120,000, 5 percent note for the remaining balance. The note, plus accrued interest, is due in full on October 31, ycar 2. The Ski Factory adjusts for accrued interest revenue monthly Accounts Receivable The Ski Factory uses a balance sheet approach to account for uncollectible accounts expense. Outstanding accounts receivable on December 31, year 1, total $900,000. After aging these accounts, the company estimates that their net realizable value is $870,000 Prior to making any adjustment to record uncollectible accounts expense, The Ski Factory's Allowance for Doubtful Accounts has a credit balance of $8,000 Instructions a. Prepare the journal entry necessary to update the company's accounts immediately after performing its bank reconciliation on December 31, year 1 b. Prepare the journal entry necessary to adjust the company's marketable securities to market value at December 31, ycar 1 c. Prepare the journal entry necessary to accrue interest in December, year 1 d. Prepare the journal entry nccessary to report the company's accounts reccivable at their net rcalizable valuc at December 31 Page 335 ycar e. Discuss briefly how the entry performed in part d affects the accounts receivable turnover rate. Does the write-off of an account receivable affect the accounts receivable turnover rate differently than the entry performed in part d? Explain.

Explanation / Answer

a)Dec31 Bank service charges a/c Dr 50

Accounts recievable a/c Dr 750

To Bank/ Cash a/c 800

(Being entry passed for Bank service charges and customer cheques returned for non sufficient funds and therefore accounts recievable being brought to its original balance for the cheque amount)

Dec 31 Bank/Cash a/c Dr 468

To Office supplies a/c 468

( Being error now rectified)

No entries are passed for Deposits in transit and Outstanding cheques.

b) Dec 31 Marketable securities a/c Dr 5000

To Unrealised gains a/c 5000

(Being Marketable securities adjusted to Mark to Market)

C) Dec 31 Arctic Lodge a/c Dr 500

To Interest accrued a/c 500

(Being interest accrued on note for 120000 at 5 % interest-120000×5/100=6000.Dec interest 6000/12=500.

d) Dec 31 Doubtful accounts allowance a/c Dr 8000

Uncollectable accounts a/c Dr 22000

To Outstanding accounts a/c 30000

(Being Outstanding accounts recievable recorded at NRV)

e) Accounts revievable turnover ratio= Net annual credit sales/ Accounts recievables. Generally this ratio should be good for company otherwise company's credit policy is restrictive and collection too lax.

So by passing entry in d above the accounts recievable is reduced,so the rate will be effected in negative way which means collection lax. This also means the Credit turnover is not converting into collection.

  

  

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