Saturday 15 March 2014

Web Wizard, Inc., has provided information technology services for several years. The company uses the percentage of credit sales method to estimate bad debts for internal monthly reporting purposes. At the end of each quarter, the company adjusts its records using the aging of accounts receivable method. The company entered into the following selected transactions during the first quarter of 2010.

Web Wizard, Inc., has provided information technology services for several years. The company uses the percentage of credit sales method to estimate bad debts for internal monthly reporting purposes. At the end of each quarter, the company adjusts its records using the aging of accounts receivable method. The company entered into the following selected transactions during the first quarter of 2010.
  
(a)
During January, the company provided services for $40,500 on credit.
(b)
On January 31, the company estimated bad debts using 2 percent of credit sales on the current month services.
(c)
On February 4, the company collected $21,400 of accounts receivable.
(d)
On February 15, the company wrote off a $135 account receivable.
(e)
During February, the company provided services for $30,100 on credit.
(f)
On February 28, the company estimated bad debts using 2 percent of credit sales on the current month services.
(g)
On March 1, the company loaned $2,800 to an employee who signed a 6% note, due in 6 months.
(h)
On March 15, the company collected $135 on the account written off one month earlier.
(i)
On March 31, the company adjusted for uncollectible accounts, based on an aging analysis (below). Allowance for Doubtful Accounts has an unadjusted credit balance of $1,050.
(j)
On March 31, the company accrued interest earned on the note.
  
Number of Days Unpaid            
 Customer
Total
0-30
31-60
61-90
Over 90  
   Alabama Tourism
$     220
$   100
$    100
$    20

   Bayside Bungalows
460



$   460  
   Others (not shown to save space)
17,270
7,000
8,410
1,050
810  
   Xciting Xcursions
400
400









 Total Accounts Receivable
$ 18,350
$ 7,500
$ 8,510
$ 1,070
$ 1,270  
 Estimated Uncollectible (%)

2%
10%
30%
40%  


Requirement 1:
(a)
For items a – j, analyze the amount and direction ( + or – ) of effects on specific financial statement accounts and the overall accounting equation.
  

 Assets

 =
Liabilities
 +
Stockholders’ Equity

  a.
Accounts receivable
+40,500  



Service revenue
+40,500  








  b.
Allow. for doubtful accts
-810  



Bad debt expense
-810  








  c.
Cash
+21,400  






Accounts receivable
-21,400  













  d.
Accounts receivable
-135  






Allow. for doubtful accts
+135  













  e.
Accounts receivable
+30,100  



Service revenue
+30,100  








  f.
Allow. for doubtful accts
-602  



Bad debt expense
-602  








  g.
Cash
-2,800  






Note receivable
+2,800  













  h.
Accounts receivable
+135  






Allow. for doubtful accts
-135  






Cash
+135  






Accounts receivable
-135  













  i.
Allow. for doubtful accts
-780  



Bad debt expense
-780  








  j.
Interest receivable
+14  



Interest revenue
+14  

  
(b)
Prepare the journal entries for the above items. (Omit the "$" sign in your response.)
  

General Journal
Debit
Credit
  a.
 Accounts receivable
        


      Service revenue

      




  b.
 Bad debt expense
        


      Allowance for doubtful accounts

      




  c.
 Cash
       


      Accounts receivable

      




  d.
 Allowance for doubtful accounts
        


      Accounts receivable

      




  e.
 Accounts receivable
        


      Service revenue

      




  f.
 Bad debt expense
        


      Allowance for doubtful accounts

      




  g.
 Note receivable
        


      Cash

      




  h.
 Accounts receivable
        


      Allowance for doubtful accounts

      





 Cash
        


      Accounts receivable

      




  i.
 Bad debt expense
        


      Allowance for doubtful accounts

      




  j.
 Interest receivable
        


      Interest revenue

      

 
rev: 03-02-2011

Explanation:
1:
i. Allowance for Doubtful Accounts AJE = $1,830 desired (see calculation below)
                                                           – $1,050 current
    = $ 780 adjustment         
  

Total
0-30
31-60
61-90
>90
  Total Accounts Receivable
$ 18350
$  7,500      
$ 8,510      
$ 1,070       
$ 1,270     
  Estimated Uncollectible (%)

   × 2%      
   × 10%     
× 30%     
× 40%    






  Estimated Uncollectible ($)
$   1,830   
$     150      
$     851     
$     321      
$    508     

  
j. Interest = Principal x Rate x Time = $2,800 x 6% x 1/12 = $14

Requirement 2:
Show how the receivables related to these transactions would be reported in the current assets section of a classified balance sheet. (Input all amounts as positive values.Omit the "$" sign in your response.)
  
WEB WIZARD, INC.
      Partial Balance Sheet     
         At March 31, 2010          
Assets


  Current assets:


        Accounts receivable
$  

        Less: Allowance for doubtful accounts

$  
       


        Note receivable


        Interest receivable



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