Concept explainers
(a)
Accounts receivable
Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.
Note receivable:
Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or, borrower to the lender or creditor. Notes receivable is an asset of a business.
To prepare: Journal and
(a)
Answer to Problem 8.1CACR
Prepare
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
January 1 | Notes Receivable | 1,200 | |
Accounts Receivable – Company B | 1,200 | ||
(To record the acceptance of notes receivable in exchange of accounts receivable) | |||
January 3 | Allowance for Doubtful Accounts (1) | 730 | |
Accounts Receivables | 730 | ||
(To write-off of Corporation W accounts and Company D) | |||
January 8 | Inventory | 17,200 | |
Accounts Payable | 17,200 | ||
(To record the purchase of inventory on account) | |||
January 11 | Accounts Receivables | 25,000 | |
Sales revenue | 25,000 | ||
(To record the sale of inventory on account) | |||
January 11 | Cost of Goods Sold | 17,500 | |
Inventory | 17,500 | ||
(To record the cost of goods sold on January 11) | |||
January 15 | Cash | 970 | |
Service Charge Expenses (2) | 30 | ||
Sales Revenue | 1,000 | ||
(To record the sale of inventory by accepting credit card payment) | |||
January 15 | Cost of Goods Sold | 700 | |
Inventory | 700 | ||
(To record the cost of goods sold on January 15) | |||
January 17 | Cash | 22,900 | |
Accounts Receivable | 22,900 | ||
(To record the collection of cash on account) | |||
January 21 | Accounts Payable | 16,300 | |
Cash | 16,300 | ||
(To record the cash payment on account) | |||
January 24 | Accounts Receivable | 280 | |
Allowance for Doubtful Accounts | 280 | ||
(To reverse the write off of Company D’s accounts) | |||
January 24 | Cash | 280 | |
Accounts Receivable | 280 | ||
(To record the collection of cash on account from Company D) | |||
January 27 | Advertising Supplies | 1,400 | |
Cash | 1,400 | ||
(To record the purchase of advertising supplies for cash) | |||
January 31 | Other operating Expenses | 3,218 | |
Cash | 3,218 | ||
(To record the operating expenses) |
Working note:
For transaction made on January 3:
Calculate the amount of allowance for doubtful accounts.
For transaction made on January 15:
Calculate the amount of service charge expense.
Prepare adjusting entries in the books of Corporation H, to record the transactions of January month.
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
January 31 | Interest receivable | 8 | |
Interest revenue (3) | 8 | ||
(To accrue one months’ interest on Company B’s note) | |||
January 31 |
| 847 | |
Allowance for doubtful Accounts | 847 | ||
(To record bad debt expenses) | |||
January 31 | Supplies Expense (5) | 840 | |
Supplies | 840 | ||
(To record the purchase of inventory on account) | |||
January 31 | Income tax Expense (6) | 862 | |
Income taxes payable (6) | 862 | ||
(To record the income tax expense) |
Working note for adjusting entry:
Calculate the amount of interest earned on Company B’s note.
Calculate the amount of bad debt expenses.
Calculate the amount of supplies expenses.
Explanation of Solution
Explanation for journal entries:
January 1: Exchange of accounts receivable for notes receivable.
- Notes receivable is an asset account, which is increased on exchange of accounts receivable for note. Hence, an increase in notes receivable is debited.
- Accounts receivable is an asset account, which is decreased to cancel the receivable on account. Hence, a decrease in accounts receivable is credited.
January 3: Write-off of uncollectible receivables.
- To record this write-off of uncollectible receivables, both allowance for bad debts and accounts receivable must be decreased by $730.
- Hence, a decrease in Allowance for doubtful accounts (contra asset account) is debited with $730, and a decrease in accounts receivable (asset account) is credited with $730.
January 8: Purchase of inventory on account.
- Purchase of inventory on account increases accounts payable balance an inventory balance. Inventory is an asset account, which is increased on purchase. Hence, an increase in inventory account is debited.
- Accounts payable is a liability, which is increased by $17,200. Hence, an increase in accounts payable account is credited.
January 11: Sale on account.
- Sale on account increases accounts receivable and sales revenue account. Hence, an increase in accounts receivable (asset account) is debited with $25,000, and
- An increase in sales revenue (
stockholders’ equity account) is credited with $25,000.
January 11: Cost of goods sold.
- Cost of goods sold is expense account, which is increased by $17,500. Hence, cost of goods sold is debited.
- Inventory is an asset account, which is decreased by $17,500. Hence, inventory is credited to decrease its balance by $17,500.
January 15: Sale of inventory by accepting credit card payment.
Corporation H sold its inventory for $1,000 and accepted a credit card payment. For accepting the credit card payment Corporation H incurred 3% bank charge on its $1,000 sales. This transaction increases cash, service charge expense, and sales revenue. Hence,
- Increase in cash (asset account) is debited with $970,
- Increase in service charge expense (decrease in stockholders’ equity) is debited with $30, and
- Increase in sales revenue (Stockholders’ equity) is credited with $1,000.
January 15: Cost of goods sold.
- Cost of goods sold is expense account, which is increased by $700. Hence, cost of goods sold is debited.
- Inventory is an asset account, which is decreased by $700. Hence, inventory is credited to decrease its balance by $700.
January 17: Collection of cash on account.
Collection of cash on account, increases cash and decreases accounts receivable by $22,900. Hence,
- An increase in cash (asset account) is debited with $22,900, and
- A decrease in accounts receivable (asset account) is credited with $22,900.
January 21: Payment of cash on account.
Payment of cash on account, decreases cash and decreases accounts receivable by $16,300. Hence,
- A decrease in cash (asset account) is debited with $16,300, and
- A decrease in accounts payable (liability account) is credited with $16,300.
January 24: Reverse the write off of Company D’s accounts.
Corporation H has recovered $280 from a customer (Company D), whose account is previously written off as uncollectible. Now, Corporation H required reversing the entry, which is previously written off as uncollectible receivables. Hence,
- Accounts receivable (asset account) is debited to increase its balance by $280, and
- Allowance for doubtful accounts (contra asset account) is credited to increase its balance by $280.
January 24: Collection of cash on account.
Collection of cash on account, increases cash and decreases accounts receivable by $280. Hence,
- An increase in cash (asset account) is debited with $280, and
- A decrease in accounts receivable (asset account) is credited with $280.
January 27: Purchase of supplies.
Purchase of supplies, decreases cash and increases supplies by $1,400. Hence,
- An increase in supplies (asset account) is debited with $1,400, and
- A decrease in cash (asset account) is credited with $1,400.
January 31: Payment of other operating expense.
Payment of other operating expense, decreases cash and increases expenses account by $3,218. Hence,
- An increase in other operating expense (asset account) is debited with $3,218, and
- A decrease in cash (asset account) is credited with $3,218.
Explanation for adjusting entries:
January 31: Accrued interest revenue.
On January 31, Corporation H has to record accrued interest revenue of $8 (3) on Company B’s note due. To record this accrued interest revenue, both interest receivable, and interest revenue must be increased by $8.
- Interest receivable is an asset, thus interest receivable is debited to increase its balance by $8.
- Interest revenue is a stockholders’ equity account, thus interest revenue is credited to increase its balance by $8.
January 31: Bad debt expense.
- An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $847 (4) and
- An increase in allowance for doubtful accounts (contra-asset account) is credited with $847.
January 31: Supplies expense.
- An increase in supplies expense (decrease in stockholders’ equity account) is debited with $840 (5) and,
- A decrease in supplies accounts (asset account) is credited with $840.
January 31: Income tax expense.
- An increase in income tax expense (decrease in stockholders’ equity account) is debited with $862 (6) and
- An increase in income tax payable accounts (liability account) is credited with $862.
(b)
To prepare: An adjusted
(b)
Explanation of Solution
Prepare an adjusted trial balance at January 31, 2017 for Corporation H.
Incorporation H | ||
Adjusted Trial Balance | ||
January 31, 2017 | ||
Particulars | Debit ($) | Credit ($) |
Cash | 16,332 | |
Notes Receivable | 1,200 | |
Accounts Receivable | 19,950 | |
Allowance for Doubtful Accounts | 1,197 | |
Interest Receivable | 8 | |
Inventory | 8,400 | |
Supplies | 560 | |
Accounts Payable | 9,650 | |
Income tax payable | 862 | |
Common Stock | 20,000 | |
Retained Earnings | 12,730 | |
Sales Revenue | 26,000 | |
Cost of Goods Sold | 18,200 | |
Advertising Supplies Expense | 840 | |
Bad Debt Expense | 847 | |
Service Charge Expense | 30 | |
Other Operating Expenses | 3,218 | |
Interest Revenue | 8 | |
Income tax expense (6) | 862 | |
Total balance | $70,447 | $70,447 |
Working note:
Prepare T-accounts for accounts with multiple transactions, to determine the ending balance of each account.
Cash
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 1 | Opening balance | 13,100 | January 21 | Accounts payable | 16,300 |
January 15 | Sales revenue | 970 | January 27 | Advertising supplies | 1,400 |
January 17 | Accounts receivable | 22,900 | January 31 | Operating expenses | 3,218 |
January 24 | Accounts receivable | 280 | |||
January 31 | Ending balance | 16,332 |
Accounts receivable
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 1 | Opening balance | 19,780 | January 1 | Notes receivable | 1,200 |
January 11 | Sales revenue | 25,000 | January 3 | Allowance for doubtful accounts | 730 |
January 24 | Allowance for doubtful accounts | 280 | January 17 | Cash | 22,900 |
January 24 | Cash | 280 | |||
Ending balance | 19,950 |
Allowance for Doubtful Accounts
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 3 | Accounts receivable | 730 | January 1 | Opening balance | 800 |
January 24 | Accounts receivable | 280 | |||
January 31 | Bad debt expenses (Adjusting entry) | 847 | |||
January 31 | Ending balance | 1,197 |
Inventory
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 1 | Opening balance | 9,400 | January 11 | Cost of goods sold | 17,500 |
January 8 | Accounts payable | 17,200 | January 15 | Cost of goods sold | 700 |
January 31 | Ending balance | 8,400 |
Supplies
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 27 | Cash | 1,400 | January 31 |
Advertising Supplies Expenses (Adjustment) | 840 |
January 31 | Ending balance | 560 |
Accounts payable
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 21 | Cash | 16,300 | January 1 | Opening balance | 8,750 |
January 8 | Inventory | 17,200 | |||
January 31 | Ending balance |
9,650 |
Cost of Goods Sold
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 11 | Inventory | 17,500 | |||
January 15 | Inventory | 700 | |||
January 31 | Ending balance | 18,200 |
Sales return
Date | Particulars |
Debit ($) | Date | Particulars |
Credit ($) |
January 11 | Accounts Receivable | 25,000 | |||
January 15 | Cash | 970 | |||
January 15 | Cash | 30 | |||
January 31 | Ending balance |
26,000 |
(c)
To prepare: An income statement, a retained earnings statement for the month ending of January 31, 2017, and a classified balance sheet as of January 31, 2017.
(c)
Answer to Problem 8.1CACR
Prepare an income statement for Incorporation H for the month ending of January 31, 2017.
Incorporation H | ||
Income Statement | ||
For the Month Ending of January 31, 2017 | ||
Particulars | Amount in ($) | Amount in ($) |
Sales revenue | 26,000 | |
Less: Cost of goods sold | 18,200 | |
Gross profit | 7,800 | |
Operating expenses: | ||
Other operating expenses | 3,218 | |
Bad debt expense | 847 | |
Advertising Supplies expense | 840 | |
Service charge expense | 30 | |
Total operating expenses | 4,935 | |
Income from operations | 2,865 | |
Add: Other revenues and gains: | ||
Interest revenue | 8 | |
Income before taxes | 2,873 | |
Less: Income tax expense 30% | (6) 862 | |
Net income after tax | $2,011 |
Working note:
Calculate the amount of income tax.
Prepare retained earnings statement for Incorporation H for the month ending of January 31, 2017.
Incorporation H | |
Retained Earnings Statement | |
For the Month Ending of January 31, 2017 | |
Particulars | Amount (in $) |
Retained earnings, January 1 | 12,730 |
Add: Net income | 2,011 |
Retained earnings, January 31 | $14,741 |
Prepare a classified balance statement for Incorporation H, as on January 31, 2017.
Incorporation H | ||
Balance Sheet | ||
As on January 31, 2017 | ||
Assets | Amount (in $) | Amount (in $) |
Current assets: | ||
Cash | 16,332 | |
Notes receivable | 1,200 | |
Accounts receivable | 19,950 | |
Less: Allowance for doubtful accounts | 1,197 | 18,753 |
Interest receivable | 8 | |
Inventory | 8,400 | |
Supplies | 560 | |
Total assets | $45,253 | |
Liabilities and Stockholders’ Equity | Amount (in $) | Amount (in $) |
Current liabilities: | ||
Accounts payable | 9,650 | |
Income taxes payable | 862 | |
Total liabilities | 10,512 | |
Stockholders’ equity: | ||
Common stock | 20,000 | |
Retained earnings | 14,741 | |
Total stockholders’ equity | 34,741 | |
Total liabilities and stockholders’ equity | $45,253 |
Explanation of Solution
- All revenue and expenses items are reported in the income statement.
- The retained earnings of Incorporation H for the year month ended January 31, 2017 are determined by adding the dividends from the net income and retained earnings as on January 1, 2017.
- Cash, accounts receivable, notes receivable, interest receivable, supplies and inventory are the resources of the business. Since, these are short-term assets; all are reported under current asset section.
- Accounts payable, income taxes payable is a short-term liability; hence it is also classified under current liabilities.
- Common stock is the value of investment made in the business by the stockholders. Hence, common stock is classified under Stockholders’ equity section. Retained earnings of $14,741 are reported under Stockholders’ equity section, because retained earnings are the amount of owners claim on the assets of the business.
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Chapter 8 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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