Chapter 5, Problem 21E

1.

To determine

Prepare journal entries to record each transaction of 3D.

Explanation of Solution

Prepare journal entries to record each transaction of 3D as follows:

Date	Account Title and Explanation		Debit ($)	Credit ($)
January 2	Cash		35,100
		Service revenue		35,100
	(To record the service  provided for cash)
January 6	Accounts receivable		72,400
		Service Revenue		72,400
	(To record the services provided on account )
January 15	Allowance for uncollectible accounts		1,000
		Accounts receivable		1,000
	(To record the writing-off uncollectible accounts)
January 20	Salaries expense		31,400
		Cash		31,400
	(To record receipt of cash for salaries )
January 22	Cash		70,000
		Accounts receivable		70,000
	(To record receipt of cash on account)
January  25	Accounts payable		5,500
		Cash		5,500
	(To record paying cash on account)
January 30	Utilities expense		13,700
		Cash		13,700
	(To record utilities expenses paid)

Table (1)

2.a.

To determine

Prepare adjusting entry at the end of January for Allowance for uncollectible accounts.

Explanation of Solution

Journal entry for adjustment of Allowance for uncollectible accounts:

Date	Particulars		Debit	Credit
January 31	Bad debt Expense (1)		1,100
		Allowance for uncollectible accounts		1,100
	(To record adjustment of allowance for uncollectible accounts)

Table (2)

Working notes:

Calculate allowance for uncollectible accounts.

$\begin{array}{c}\text{Allowance for uncollectible accounts=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Accounts receivable}\times \\ \text{Percentage of estimation }\\ \text{which will not be collected}\end{array}\right)+\\ \left(\begin{array}{l}\text{Remaining accounts receivable(2) }\times \\ \text{Percentage of estimation }\\ \text{which will not be collected}\end{array}\right)-\\ \text{Estimation of uncollectible accounts(3)}\end{array}\right]\\ =\left[\left(\$5,000\times 20\%\right)+\left(\$10,000\text{(2)}\times 5\%\right)-\$400\text{(3)}\right]\\ =\left[\left(\$1,000\right)+\left(500\right)-400\right]\\ =\$1,100\end{array}$

(1)

Calculate the remaining accounts receivable.

$\begin{array}{c}\text{Remaining accounts receivable=}\left[\begin{array}{l}\text{Accounts rceivable+Services provided on account}-\\ \mathrm{Re}\text{ceived cash on accounts receivable}-\\ \text{Writting of accounts receivable as uncollectible}-\\ \text{Accounts receivable past dues}\end{array}\right]\\ =\left[\$13,600+\$72,400-\$70,000-\$1,000-\$5,000\right]\\ =\$10,000\end{array}$

(2)

Calculate the estimation of uncollectible accounts.

$\begin{array}{c}\text{Estimation of uncollectible accounts=}\left[\begin{array}{l}\text{Allowance for uncollectible accounts(credit)}-\\ \text{Writting off accounts receivable as uncollectible}\end{array}\right]\\ =\left[\$1,400-\$1,000\right]\\ =\$400\end{array}$

(3)

• Bad debt expense is a component of stockholders’ equity and decreased it. So, debit bad debt expense for $1,100 and,
• Allowance for uncollectible accounts is a contra asset account and decreased it. So, credit allowance for uncollectible accounts for $1,100.

2.b.

To determine

Record the adjustment of supplies expenses account.

Explanation of Solution

Journal entry for adjustment of supplies expenses account.

Date	Particulars		Debit	Credit
January 31	Supplies Expense (4)		1,800
		Supplies		1,800
	(To record adjustment of supplies expense accounts)

Table (3)

Working note:

Calculate the adjustment of supplies.

$\begin{array}{c}\text{Supplies=Supplies at the beginning of the year}-\text{Supplies at the end of the year}\\ \text{=\$2,500}-\$700\\ =\$1,800\end{array}$

(4)

• A supplies expense is an expense which is a component of stock holder’s equity and it decreases. Hence, debit the supplies expenses account with $1,800.
• A supply is an asset and it decreases. Hence, credit the supplies account with $1,800.

2.c.

To determine

Prepare the adjustment entry of interest receivable.

Explanation of Solution

Date	Account Title and Explanation		Debit ($)	Credit ($)
January  31	Interest receivable (5)		100
		Interest revenue		100
	(To record adjustment for accrued interest)

Table (4)

Working note:

Calculate interest revenue.

$\begin{array}{c}\text{ Interest revenue=Face value}\times \text{interest}\times \text{fraction of the year}\text{.}\\ =\$20,000\times 6\%\times \frac{1}{12}\\ =\$100\end{array}$

(5)

• Interest receivable is an asset and it increases. Hence debit the interest receivable
• Interest revenue is a component of stock holders’ equity and increased it. Hence credit the interest revenue.

2.d.

To determine

Prepare adjustment entry to record unpaid salaries.

Explanation of Solution

Date	Particulars		Debit	Credit
January 31	Salaries Expense (4)		33,500
		Salaries payable		33,500
	(To record adjustment of salaries payable accounts)

Table (5)

• Salaries expense is a expense which is a component of stock holders’ equity and it decreases. Hence, debit the salaries expenses account.
• Salaries payable is a liability and it increases. Hence, credit the salaries payable account.

3.

To determine

Prepare an adjusted trial balance as of January 31, 2021, after updating beginning balances for transactions during January in the requirement 1 and adjusting entries at the end of January in the requirement 2.

Explanation of Solution

Prepare adjusted trail balance.

Fireworks 3D
Adjusted Trial Balance as of
For the year January 31, 2021
Accounts	Debit ($)	Credit ($)
Cash(6)	$78,400
Accounts Receivable(7)	15,000
Interest Receivable(8)	100
Supplies(9)	700
Notes Receivable(10)	20,000
Land(11)	77,000
Allowance for Uncollectible Accounts(12)		$1,500
Accounts Payable(13)		1,700
Salaries Payable(14)		33,500
Common Stock(15)		96,000
Retained Earnings(16)		32,400
Service Revenue(17)		107,500
Interest Revenue(18)		100
Supplies Expense(19)	1,800
Salaries Expense(20)	64,900
Utilities Expense(21)	13,700
Bad Debt Expense(22)	1,100
Total	$272,700	$272,70

Table (6)

Working notes:

Calculate ending cash balance.

$\begin{array}{c}\text{Ending cash balance=}\left[\begin{array}{l}\text{Beginning cash balance +}\\ \text{Services on cash+}\\ \text{Received cash on accounts receivable}-\\ \text{Salaries paid in cash}-\\ \text{accounts payable paid in cash}-\\ \text{utilities paid in cash}\end{array}\right]\\ =\left[\$23,900+\$35,100+\$70,000-\$31,400-\$5,500-\$13,700\right]\\ =\$78400\end{array}$

(6)

Calculate ending accounts receivable.

$\begin{array}{c}\text{Ending accounts receivable=}\left[\begin{array}{l}\text{Beginning accounts receivable +}\\ \text{Providing services on account}-\\ \text{Writing off accounts receivable as uncollectible}-\\ \text{Cash received on accounts receivable}\end{array}\right]\\ =\left[\$13,600+\$72,400-\$1,000-\$70,000\right]\\ =\$15,000\end{array}$

(7)

Calculate ending supplies balance.

$\begin{array}{c}\text{Ending supplies balance=}\left[\begin{array}{l}\text{Beginning balance}-\\ \text{Supplies incurred at the}\\ \text{ end of the accounting year}\end{array}\right]\\ \text{=\$2,500}-\$1,800\\ =\$700\end{array}$

(8)

Calculate ending balance of uncollectible accounts.

$\begin{array}{c}\left[\begin{array}{l}\text{Ending allowance }\\ \text{for uncollectible accounts}\end{array}\right]\text{=}\left[\begin{array}{l}\text{Beginning balance }-\\ \text{Write-off accounts receivable as uncollectible+}\\ \text{Allowance for uncollectible accounts }\\ \text{incurred at the end of the accounting year}\end{array}\right]\\ =\$1,400-\$1,000+\$1,100\\ =\$1,500\end{array}$

(9)

Calculate ending accounts payable.

$\begin{array}{c}\text{Ending accounts payable=Beginning balance}-\text{Paid cash on accounts payable}\\ \text{=\$7,200}-\$5,500\\ =\$1,700\end{array}$

(10)

Calculate ending service revenue.

$\begin{array}{c}\text{Ending service revenue=Services provided on cash+Services provided on account}\\ \text{=\$35,100+\$72,400}\\ \text{=\$107,500}\end{array}$

(11)

Calculate ending salaries expense.

$\begin{array}{c}\text{Ending salaries expenses=}\left[\begin{array}{l}\text{Paid cash for salaries+}\\ \text{Salaries incurred at the}\\ \text{ end of accounting year}\end{array}\right]\\ \text{=\$31,400+\$33,500}\\ =\$64,900\end{array}$

(12)

4.

To determine

Prepare an income statement for the period ended January 31, 2021 of 3D.

Explanation of Solution

Prepare income statement.

Fireworks 3D
Income statement
For the year ended January 31, 2018
Particulars	Amount ($)	Amount ($)
Revenues:
Service revenue	$107,500
Interest revenue	100
Total revenues		107,600
Expenses:
Supplies expense	1,800
Salaries expense	64,900
Utilities expense	13,700
Bad debt expense	1,100
Total expenses		81,500
Net income		$26,100

Table (7)

5.

To determine

Prepare a classified balance sheet as on 31^st January 2021.

Explanation of Solution

Prepare a classified balance sheet.

Fireworks 3D
Balance sheet
January 31, 2021
Assets	Amount ($)	Liabilities	Amount ($)
Cash	$78,400	Accounts payable	$1,700
Accounts receivable	$15,000	Salaries payable	33,500
Less: Allowance	(1,500)	Total current liabilities	35,200
Net accounts receivable	13,500
Interest receivable	100
Supplies	700
Total current assets	92,700	Stockholders’ Equity
		Common stock	96,000
Notes receivable	20,000	Retained earnings (23)	58,500
Land	77,000	Total stockholders’ equity	154,500
Total assets	$189,700	Total liabilities and stockholders’ equity	$189,700

Table (8)

Working note:

Calculate retained earnings.

$\begin{array}{c}\text{Retained earnings=Beginning retained earnings+Net income}-\text{Dividends}\\ \text{=\$32,400+\$26,100}-\$0\\ =\$58,500\end{array}$

(13)

6.

To determine

Prepare journal entry to record closing entries of 3D.

Explanation of Solution

Journal entry for closing revenue accounts of Fireworks 3D:

Date	Particulars		Debit	Credit
January 31, 2021	Service Revenue		107,500
	Interest Revenue		100
		Retained Earnings		107,600
	(To record closing of revenue accounts)

Table (9)

• Service revenue is a component of stock holders’ equity and decreased it. So debit service revenue account.
• Interest revenue is a component of stock holders’ equity and decreased it.  So debit the interest revenue.
• Retained earnings are a liability and increased it. So credit the retained earnings.

Journal entry for closing expense accounts of Fireworks 3D:

Date	Particulars		Debit ($)	Credit ($)
January 31, 2021	Retained Earnings		81,500
		Supplies expense		1,800
		Salaries expense		64,900
		Utilities expense		13,700
		Bad debt expense		1,100
	(To record closing of expense accounts)

Table (10)

• Retained earnings are a liability and decreased it. So debit the retained earnings.
• Supplies expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the supplies expense account.
• Salaries expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the salaries expense account.
• Utilities expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the utilities expense account.
• Bad debt expenses are an expense which is a component of stock holder’s equity and decreases it. So credit the bad debt expense account.

7.a.

To determine

Calculate the receivables turnover ratio for the month of January and if the industry average of the receivables turnover ratios for the month of January is 4.2 times and whether the company is collecting cash from customers more or less efficiently than other companies in the same industry.

Explanation of Solution

Accounts receivable turnover ratio:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables and it indicates the number of times the average amount of net accounts receivables collected during a particular period

Higher receivables turnover ratio is preferable, since the more number of times the average amount of net accounts receivables collected during a particular period is better.

Calculate receivable turnover ratio.

$\begin{array}{c}\text{Receivables turnover ratio=}\frac{\text{Net sales}}{\text{Average accounts receivable}}\\ \text{Fireworks 3D}=\frac{\$72,400}{\$14,300(14)}\\ =5.1\text{times}\end{array}$

Working note:

Calculate average accounts receivable.

$\begin{array}{c}\text{Average accounts receivable=}\left[\begin{array}{l}\text{Beginning accounts receivable +}\\ \text{ending accounts receivable}\end{array}\right]\\ \text{Fireworks 3D=}\frac{\text{\$13,600+\$15,000}}{2}\\ =\$14,300\\ \end{array}$

(14)

7.b.

To determine

Calculate the ratio of allowance for uncollectible accounts to accounts receivable at the end of January and based on a comparison of this ratio to the same ratio at the beginning of January, and to see whether the company expect an improvement or worsening in cash collections from customers on credit sales.

Explanation of Solution

Calculate ratio for allowance for uncollectible accounts to accounts receivable.

$\begin{array}{c}\text{Ratio for allowance for uncollectible accounts=}\frac{\text{Allowance for uncollectible accounts}}{\text{Accounts receivable}}\\ =\frac{\$1,400}{\$13,600}\\ =10.3\%\end{array}$

The allowance is lower in relation to accounts receivable at the end of the month indicating the Fireworks 3D expects an improvement in cash collections from customers.