Chapter 5, Problem 5.2BP

1.

To determine

To record: The necessary transactions for Company DRS on each date.

Answer to Problem 5.2BP

Journal entries for the Company DRS:

Date	Account Title and Explanation		Debit ($)	Credit ($)
June 16	Accounts receivable		2,700
		Service revenue (2)		2,700
	(To record services provided on account)
June 20	Sales allowance (3)		810
		Accounts receivable		810
	(To record sales allowance for services on account)
June 30	Cash (4)		1,890
		Accounts receivable		1,890
	(To record receipt of cash on account)

Table (1)

Explanation of Solution

On June 10:

No entry is required because Person R crashes the hard drive and sends to the Company DRS.

On June 12:

No entry is required because after initial evaluation Company DRS emails Person R to let him know that full data recovery will cost $3,000.

On June 13:

No entry is required because Person R informs to Company DRS that he would like them to recover the date and that he is a student at UCLA, qualifying him for 10% educational discount and reducing the cost by $\$300=\$3,000\times 10\%$.

On June 16:

• An increase in accounts receivable (asset account) is debited and,
• An increase in sales revenue (stockholders’ equity account) is credited.

Working notes:

$\begin{array}{c}\text{Trade discount=Accounts receivable}\times \text{Percentage of accounts receivable}\\ \text{=\$3,000}\times \text{10\%}\\ \text{=\$300}\end{array}$ (1)

$\begin{array}{c}\text{Service revenue=Accounts receivable}-\text{Trade discount}\\ \text{=\$3,000}-\$300(1)\\ =\$2,700\end{array}$ (2)

On June 19:

No entry is required because when Person R receives the hard drive he notices that Company DRS did not successfully recover all data. Where approximately 30% of the data has not been recovered and he informs to Company DRS.

On June 20:

• An increase in sales allowances (stockholders’ equity account) is debited and,
• A decrease in accounts receivable (asset account) is credited.

$\begin{array}{c}\text{Sales allowance=Accounts receivable}\times \text{Percentage of sales allowance}\\ \text{=\$2,700}\times \text{30\%}\\ \text{=\$810}\end{array}$ (3)

On June 30:

• An increase in cash (assets) it is debited and,
• A decrease in accounts receivable (asset account) is credited.

Determine the amount of cash received from Person R:.

$\begin{array}{c}\begin{array}{l}\text{Cash received from}\\ \text{Person R}\end{array}\}\text{ = }\left[\text{Amount of accounts receivable}-\text{Sales discount}\right]\\ =\$2,700-\$810(3)\\ =\$1,890\end{array}$ (4)

2.

To determine

To show: Company DRS net revenues in its income statement

Explanation of Solution

Company DRS
Partial Income Statement
Particulars	Amount($)	Amount ($)
Total service revenues	$2,700.00
Less: Sales allowances	(810)
Net service revenues		$1,890

Table (2)

Conclusion

Hence, Company DRS net service revenues are $1,890.

3.

To determine

To Calculate: Net revenues if Person R had paid his bill on June 25.

Answer to Problem 5.2BP

Journal entry for receipt of cash on account:

June 25	Cash		1,852.2
	Sales discounts (5)		37.8
		Accounts receivable (4)		1,890
	(To record receipt of cash on account)

Table (3)

Explanation of Solution

On June 25:

Services rendered on June 20 and the payment is received on June 25. Here Person P make payment on its 5^th day from the date of service received. Hence, Person P is eligible to get a sales discount of 2%. Thereby, Company DRS must have received its receivables after deducting the sales discount of 2%. This transaction increases cash, sales discount and decreases accounts receivable. Increase in cash (asset account) is debited, increase in sales discount (decrease in stockholders’ equity account) is debited, and a decrease in accounts receivable (asset account) is credited.

Working note for journal entry made on June 25:

Determine the amount of sales discount.

$\begin{array}{c}\text{Sales Discount}=\text{Accounts receivable×Rate of sales discount}\\ =\text{\$1,890}\times 2\text{\%}\\ \text{=\$37}\text{.8}\end{array}$ (5)

Particulars	Amount($)	Amount ($)
Total service revenues	$2,700.00
Less: Sales allowances	(810.00)
Sales discounts	(37.80)
Net service revenues		$1,852.20

Table (4)

Conclusion

Hence, Company DRS net service revenues are $1,852.20 if Person R pays his bill on June 25.