TRANSACTION ANALYSIS: Mima Inc. has been in operation for two years. Below find
ID: 2563273 • Letter: T
Question
TRANSACTION ANALYSIS: Mima Inc. has been in operation for two years. Below find description of activities that occurred during Y8. You might find it helpful to prepare journal entry for each transaction.
Transaction 2 - December 31, Y8: The unadjusted credit balance of the Allowance for Doubtful Accounts account is $6,000. Bad debt expense is estimated to be 3.5% of net credit sales of $800,000. Present the necessary year-end adjusting entry related to uncollectible accounts
a. What is the amount of the adjustment?
$800,000
$28,000
$22,000
$6,000
$210
b.
Indicate the account title to be debited.
Acct Receivable
Allowance for Doubtful Accts
Bad Debt Expense
Cash
Sales Revenue
c.
Indicate the account title to be credited.
Acct Receivable
Allowance for Doubtful Accts
Bad Debt Expense
Cash
Sales Revenue
Part 2. Transaction 3A - July 1, Y8: Mima purchased 3-year insurance plan (effective 7/1/Y8 through 6/30/Y11) for $3,600 cash.
Indicate the account title to be debited by $3,600.
Acct Payable
Allowance for Insurance
Cash
Insurance Expense
Prepaid Insurance
Indicate the account title to be credited by $3,600.
Acct Payable
B.
Allowance for Insurance
C.
Cash
D.
Insurance Expense
E.
Prepaid Insurance
prepare adjusting entry for the insurance expired during Y8
What is the amount of the adjustment?
$3,600
$600
$1,200
$700
$0
Indicate the account title to be debited.
Allowance for Insurance
Cash
Insurance Expense
Prepaid Insurance
None
Indicate the account title to be credited.
Allowance for Insurance
Cash
Insurance Expense
Prepaid Insurance
None
.
A.$800,000
B.$28,000
C.$22,000
D.$6,000
E.$210
Explanation / Answer
Answer
First the explanation is given, followed by the correct journal entry. On the basis of that journal entry, the correct answer (option) is being provided.
It says that the unadjusted balance in ‘Allowances for Doubtful Debts’ is $6000. Bad Debt expenses are estimated to be 3.5% of $800000 which comes to be $28000. Under this type of ‘indirect writeoff’ of receivables, Bad Debt expenses are credited to Allowances for Doubtful Debts.
Journal Entry would be----
Date
General Journal
Dr
Cr
Dec-31
Bad Debts expenses
28000
Allowances for Doubtful Debts
28000
Answer (a) Amount of adjustment is $28000 OPTION B
Answer (b) Account to be debited OPTION C Bad Debt Expense
Answer (c) Account to be credited is OPTION B Allowances for Doubtful Accts
On July 1st,an insurance is purchased for $3600 for 36 months (3 years) by paying cash. Hence, following ‘accrual’ principal, transaction will be recorded in full but only that part of expense that has been expired during Year 8 will be taken to Income Statement. In year 8, the expense will be expired for 6 months only (from July to Dec, as cash paid for insurance was in Jul). 6 month’s expired insurance is $600 [(3600/36 months) x 6 months]. Hence, following two entries will be made---
Date
General Journal
Dr
Cr
Jul-01
Prepaid Insurance
3600
Cash
3600
Dec-31
Insurance expense
600
Prepaid Insurance
600
Answer (a): Account Debited by $3600 is Prepaid Insurance – OPTION E
Answer (b): Account credited by $3600 is Cash - OPTION C
Answer (c): Amount of adjustment will be $600 – OPTION B
Answer (d): Account to be debited is Insurance expense – OPTION C
Answer (e): Account to be credited is Prepaid Insurance – OPTION D
Date
General Journal
Dr
Cr
Dec-31
Bad Debts expenses
28000
Allowances for Doubtful Debts
28000
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