Reference no: EM132864917

Question - Part 1: Accounts Receivable and the Allowance Method - Management at Dexter Co. estimates that 5% of the ending Accounts Receivable balance will be uncollectible. At the end of their first year of operations, the ending balance in Accounts Receivable is $35,000.

a. Prepare the journal entry to record Bad Debt Expense 12/31/x1

b. How does posting the journal entry in 1a affect the accounting equation?

c. If Dexter Co. does not make the journal entry in 1a, what is the effect on the financial statements? (list all effects)

d. What is the Net Realizable Value of Accounts Receivable reported in Dexter's balance sheet as of 12/31/x1.

Assume that during year 2 Dexter had net credit sales of $550,000 and collections of $535,000. During year 2, Dexter also identified $3,500 of Accounts Receivable to write-off due to customers' inability to pay.

a. What journal entry would be used to record the write-off of $3,500?

b. How does posting the journal entry in 2a affect the accounting equation?

c. What is the Allowance for Doubtful Accounts balance after this write off? (Your answer should indicate the amount and whether the balance is a Debit or Credit. Hint: Use a T-account to determine your answer.)

d. Management at Dexter Co. assumes that at the end of their second year of operations 5% of its new ending Accounts Receivable balance will be uncollectible. Using the Allowance for Doubtful Accounts balance from question 2c, prepare the journal entry to record Bad Debt Expense at the end of Dexter's second year of operations. (Hint: Use a T-account to determine the year 2 ending balance in Accounts Receivable.)

Part 2: Notes & Interest Receivable - On July 31, 2020, Algae Inc. lends $60,000 to Finley Co. for 6 months. The note has a 6% annual interest rate with all principal and interest to be paid on January 31, 2021.

a. Prepare the journal entry Algae Inc. records on 7/31/2020?

b. What adjusting journal entry is required to accrue for interest revenue earned through December 31, 2020?

c. How does posting the journal entry in question 3b affect the accounting equation?

d. If Algae Inc. does not make the adjusting journal entry in 3b, what is the effect on the financial statements? (list all effects)

e. On January 31, 2021, Finley Co. pays all principal and interest owed to Algae Inc. What journal entry does Algae Inc. make to record the collection.