Notesword Process Your Solutions Within This Template Copy

Notesword Process Your Solutions Within This Template Copy And Paste

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

Paper For Above instruction

This paper analyzes and prepares financial statements and account adjustments based on a variety of transactional data provided for a hypothetical company. The focus is on understanding the interpretation and calculation of key financial ratios, journal entries for accounts receivable activities, and the impact of specific transactions on sales and related accounts. The scenarios include preparing an income statement with gross profit and earnings per share, recording bad debt adjustments and write-offs, journalizing sales discounts, returns, and payments under credit terms, and analyzing effects on various revenue and expense accounts under different sales activities, including accounting for uncollectible accounts and estimating bad debts.

Introduction

Understanding the intricacies of financial transactions involves not only recording entries accurately but also analyzing their effects on financial statements and ratios. These scenarios serve as practical exercises for applying accounting principles related to revenue recognition, receivables management, bad debt estimation, and ratio analysis. The primary goal is to develop proficiency in accounting for credit sales, bad debts, discounts, and returns, alongside interpreting financial ratios such as gross profit percentage.

Problem 1: Income Statement Preparation and Ratio Analysis

The initial scenario involves a summarized dataset for a company's year-end financials. The provided data includes cash and credit sales, cost of goods sold, selling and administrative expenses, and sales returns. The task requires calculating gross profit, operating income, net income, and earnings per share. Additionally, the gross profit percentage ratio will be computed and interpreted to assess the company's profitability.

To prepare the income statement, revenues are first categorized into cash and credit sales, with totals summed accordingly. The cost of goods sold is deducted from total sales to derive gross profit. Operating expenses are then subtracted to compute income from operations, and further adjustments for taxes facilitate net income calculation. Earnings per share are obtained by dividing net income by the number of outstanding shares.

The gross profit percentage ratio, calculated as gross profit divided by total sales, is a critical indicator of profit margin efficiency. A higher ratio reflects better control over production costs relative to sales, implying effective cost management and pricing strategies.

Problem 2: Accounts Receivable and Bad Debt Adjustments

This scenario addresses the management of accounts receivable, including write-offs and estimating bad debts. Starting with a beginning receivable balance, collections during the year, and a specific uncollectible account, the appropriate journal entries are required to reflect these events. Furthermore, estimating bad debts at 3% of credit sales is incorporated to adjust allowances and expenses.

The write-off of uncollectible receivables involves removing the account from receivables and recognizing the associated expense. The estimation of bad debts involves making adjusting entries to increase allowance for doubtful accounts, based on the percentage of credit sales, which affects both income statement expenses and balance sheet allowance accounts.

Problem 3: Journal Entries for Credit Sales and Returns

This problem involves recording journal entries for sales made on credit, payments made within or after discount periods, and returns. The terms 2/10, n/30 specify that a 2% discount is available if paid within 10 days; otherwise, full payment is due within 30 days. Each transaction scenario requires precise journal entries reflecting sales revenue recognition, cash collections with discounts, and returns.

Problem 4: Effects of Transactions on Revenue and Accounts

The final scenario covers various sales transactions under specific credit terms, including cash sales, sales to different companies, early payments within or after discount periods, returns, refunds, and account write-offs. Additionally, an estimate of bad debts at 3% of net credit sales is used to adjust for potential uncollectible accounts. The task involves categorizing each transaction's impact on sales revenue, discounts, returns, and bad debt expenses, with indications of no effect where appropriate.

Conclusion

Mastering the accounting entries and ratio analyses related to receivables, discounts, returns, and bad debts is fundamental for accurate financial reporting and managerial decision-making. Through these comprehensive exercises, one develops a thorough understanding of how to record and interpret complex transactions, ensuring that financial statements faithfully represent the company's financial position and performance.

References

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