Chapter 8, Problem 8.1CACR

(a)

To determine

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 adjusting entries in the books of Corporation H, to record the transactions of January month.

Answer to Problem 8.1CACR

Prepare journal entries in the books of Corporation H, to record the transactions of January month.

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.

$\begin{array}{c}\begin{array}{l}\text{Allowance for doubtful}\\ \text{accounts to write off}\end{array}\}\text{= }\left[\begin{array}{l}\text{Uncollectible account of Corporation W+}\\ \text{Uncollectible account of Company D}\end{array}\right]\\ =\$450+\$280\\ =\$730\end{array}$ (1)

For transaction made on January 15:

Calculate the amount of service charge expense.

$\begin{array}{c}\text{Service charge expense = Selling price of inventory}\times \text{Service charge}\\ \text{=\$1,000}\times \text{3\%}\\ \text{=\$30}\end{array}$ (2)

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	Bad Debt Expenses (4)	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.

$\begin{array}{c}\text{Interest = Note receivable }\times \text{Interest rate }\times \frac{1\text{}\text{month}}{12\text{}\text{month}}\\ =\$1,200\times 8\%\times \frac{1}{12}\\ =\$8\end{array}$ (3)

Calculate the amount of bad debt expenses.

$\begin{array}{c}\begin{array}{l}\text{Bad debt}\\ \text{expenses}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\text{Ending accounts receivable }\times \text{Expected bad debt}\right)-\\ \left(\begin{array}{l}\text{Beginning balance of allowance for doubtful accounts}-\\ \text{Allowance for doubtful account for Company C account}\end{array}\right)\end{array}\right]\\ =\left[\left(\text{\$19,950 }\times 6\%\right)-\left(\$800-\$450\right)\right]\\ =\$1197-\$350\\ =\$847\end{array}$ (4)

Calculate the amount of supplies expenses.

$\begin{array}{c}\text{Supplies expenses = }\left[\begin{array}{l}\text{Purchase of advertising supplies}-\\ \text{Unused advertising supplies}\end{array}\right]\\ =\$1,400-\$560\\ =\$840\end{array}$ (5)

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 determine

To prepare: An adjusted trial balance at January 31, 2017 for Corporation H.

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 determine

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.

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.

$\begin{array}{c}\text{Income tax = Income before taxes }\times \text{Tax percentage}\\ =\$2,873\times 30\%\\ =\$862\left(\text{Rounded off}\right)\end{array}$ (6)

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.