Reference no: EM132831981

Questions -

Q1. The Poster Co. sells direct to retail customers and also to wholesalers.

Accounts receivable and an allowance for bad debts are maintained separately for each division. On January 1, 2020, the balance of the retail accounts receivable was 209,000 while the bad debts with respect to retail customers were a credit of 7,600.

The following summary pertains only to retail sales since 2017:

Bad debts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as a percentage of the credit sales for the same period. Cash receipts in 2020 from credit sales to retail customers were 1,380,200.

Based on the above and the result of your audit, answer the following:

I. The percentage to be used to compute the allowance for bad debts on December 31, 2020 is

a. 1% c. 2%

b. 1.9% d. 3%

II. For 2020, the provision for bad debts with respect to credit sales is

a. 28,802 c. 30,000

b. 45,000 d. 57,604

III. The ledger balance of the accounts receivable after necessary adjustments on December 31, 2020 was a debit of

a. 275,396 c. 303,000

b. 288,000 d. 297,800

IV. The ledger balance of the allowance for bad debts after necessary adjustments on December 31, 2020 was a credit of

a. 10,800 c. 25,800

b. 6,600 d. 31,800

Q2. Lennon Associates loaned Mc Cartney Company 750,000 on January 1, 2017. The terms of the loan were payment in full on January 1, 2022, plus annual interest payments at 11%. The interest payment was made as scheduled on January 1, 2018, however, due to financial setbacks, Mc Cartney was unable to make its 2019 interest payment. Lennon considers the loan impaired and projects the following cash flows from the loan as of December 31, 2019 and 2020. Assume that Lennon accrued the interest on December 31, 2018, but did not continue to accrue interest due to the impairment of the loan. The prevailing interest rate for a similar type of note as of December 31, 2019, and 2020 is 10%.

Projected Cash Flows

Required -

I. Prepare the valuation adjusting entry at December 31, 2019?

II. Prepare the journal entry to record the 50,000 receipt on December 31, 2020?

III. Prepare the valuation adjusting entry on December 31, 2020?

IV. Prepare the 2021 journal entries, assuming the receipts of 150,000 as scheduled; also assume that estimates for future cash flows remain the same as they were at the end of 2020?