Notes:

• Word-process your solutions within this template. Copy and paste tables from Excel as needed.

• Show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit.

 

Problem 1

Shown below is summarized data for a company for the year end December 31.

 

Sales of merchandise for cash	$58,250
Sales of merchandise on credit	10,000
Cost of goods sold	36,500
Selling expense	11,800
Administrative expenses	5,000
Sales returns and allowances	2,000
Items not included in the above amounts:
Estimated bad debt loss, 2% of credit sales
Average income tax rate, 20%
Number of shares of common stock outstanding, 2,000

 

Based on the data, prepare an income statement that shows both gross profit and income from operations. Include the earnings per share. Calculate and interpret the meaning of the gross profit percentage ratio.
Problem 2

In one year, a company had $30,000 Sales Revenue on credit. At the start of the year, the Accounts Receivable showed a $6,000 debit balance and the Allowance for Doubtful Accounts showed a $400 credit balance. Collections of accounts receivable during the year amounted to $22,000. The following gives additional items during the year.

 

(a)    On December 31, an Account Receivable of $450 from a prior year was determined to be uncollectable; therefore, it was written off immediately as a bad debt.

(b)   On December 31, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 3 percent of credit sales for the year.

 

Give the journal entries for the items (a) and (b) at the end of the accounting period. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the income statement and balance sheet for the year. Disregard income tax considerations.

Problem 3

A company sold $18,000 of goods on credit on May 1. At the time of the sale, the company recorded a debit to Accounts Receivable and a credit to Sales Revenue for $18,000. Terms were 2/10, n/30.
Complete the journal entries the company would record for each of the following independent situations: 

(a)    The balance due was paid, less the discount, on May 10.

(b)   The balance due was paid on May 30.

(c)    Half of the goods were returned for credit on May 4. The balance due was paid, less the discount, on May 10.

Problem 4

The following data were selected from the records of a company for the year ended December 31.

 

In the following order, except for cash sales, the company sold merchandise and made collections on credit terms 2/10, n/30, assuming a unit sales price of $500 in all transactions and use the gross method to record sales revenue.

 

(a)    Sold merchandise for cash, $220,000.

(b)   Sold merchandise to Company A, invoice price, $10,000

(c)    Sold merchandise to Company B , invoice price, $25,000

(d)   Company A paid the invoice in (b) within the discount period

(e)   Sold merchandise to Company C, invoice price, $30,000

(f)     Two days after paying the account in full, Company A returned one defective unit and received a cash refund

(g)    Collected $78,400 cash from customer sales on credit in prior year, all within the discount periods

(h)   Three days after purchased date, Company B returned three of the units purchased in (c) and received account credit

(i)      Company B paid its account in full within the discount period

(j)     Sold merchandise to Company D, invoice price $12,000

(k)    Company C paid its account in full after the discount period

(l)      Wrote off an account from a previous years account of $2,000 after deciding that the amount would never be collected

(m) The estimated bad debt rate used by the company was 3 percent of credit sales net of returns

 

Using the categories shown below, indicate the effect of each listed transaction, including the write-off of the uncollectible account and the adjusting entry for estimated bad debts, ignoring the cost of goods sold. Indicate the sign and amount of the effect or the use of “NE” to indicate “no effect.” Use the following table as a guide.

 

Sales Revenue	Sales Discounts (taken)	Sales Returns and Allowances	Bad Debt Expense