Question 1 - Mason's Work Space, an office furniture seller, began its operations in early 2014. During the year Mason's Work Space sold $2,860,000 of furniture, all on account. The payments received from the customers during the year totaled $1,205,000. An investigation of the past due customer accounts at the end of the year revealed that $35,000 of these accounts were not collectible and must be written-off. However, in consulting with the auditor, Mason's Work Space decided to adopt the Allowance method for bad debt and to use 3% of Accounts Receivable to estimate the Bad Debt Expense.
Required:
1. Prepare summary Journal Entries to record
a. Sales
b. Collections
c. Write-offs
d. Year-end estimate of bad debt expense
2. Determine the net realizable value of Mason's Work Space's Accounts Receivable on December 31, 2014. Explain what the balance means.
3. Assume after the above estimate of bad debt expense has been made4 and before the closing of the year, Mason's Work Space became aware that $10,000 should be written-off. How will such information affect the Mason's Work Space's 2014 Bad Debt Expense and Net Realizable Value of its Accounts Receivable on December 31, 2014? Prepare the required journal entry.
Question 2 - Lafarga Inc. had the following Liabilities on January 1, 2014:
Accounts Payable $ 12,000
Warranty Liability 5,000
The following information about Lafarga's 2014 business is available:
1. Lafarga Inc. purchased Inventory on account from its suppliers for $29,000.
2. Made payments for Inventory of $27,000 to suppliers.
3. On April 1, Lafarga Inc. purchased Equipment & Land for $10,000 Cash, and another $55,000 Note to be paid on March 31, 2015. The cost of the Equipment is $60,000.
4. Lafarga Inc. offers a one-year limited Warranty on its product. It is estimated that 10% of all units sold will be returned for repair; and each repair will cost $50. They Sold 2,000 units in 2014.
5. The total cash cost for Warranty repair during 2014 was $11,000.
Required: Prepare Journal Entries to record all the above transactions (#'s 1-5).
Question 3 - Kawagoe Company purchased a warehouse for $650,000 on January 1, 2012. Kawagoe Company estimated that the life of the warehouse would be 10 years and the residual value at the end of 10 years would be $50,000.
Required:
1. Kawagoe Company uses the Straight-line Method of depreciation for the warehouse. Determine the Depreciation Expense on the warehouse for 2012 and 2013.
2. Kawagoe Company decided to relocate its business and sold the warehouse on January 1, 2014 for $450,000 cash. Prepare a journal entry to record the disposal.
3. Assume Kawagoe Company used Double-Declining balance method for the warehouse depreciation; repeat the questions 1 and 2 above.
4. Do both Depreciation methods result in the same amount of gain or loss upon disposal? Why or why not?
Question 4 - Jiang Company began operations in January 2011 and had the following summary transactions:
- Total Sales for 2011 amounted to $1,250,000. 60% were on credit.
- The accounts collected during year totaled $530,000.
- Accounts Receivable write-offs totaled $8,000 during the year.
Required:
1. Assume Jiang Company uses the Allowance method for Bad Debt Expense and the Bad Debt Expense is estimated to be 4% of Acc Receivable , determine the Bad Debt Expense for the year and the Net Accounts Receivable balance at the end of the year.
2. Why does GAAP require the Allowance method to be used for Bad Debt Expense? (Use Point Form)
3. Prepare the journal entries needed to record Bad Debt Expense and the Write-offs under the Allowance Method.