The Ski Factory provided the following information at Decemb

The Ski Factory provided the following information at December 31, 2015:

Bank Reconciliation: General Ledger Cash Balance, 12/31/15...$35,132 Bank Statement Balance, 12/31/15...$32,612

Bank Service Charge.......................................(50) Deposit in transit...................................4,900

Returned customer checks marked NSF........(750) Outstanding Checks............................(2,712)

Error in recording of office supplies................468 Adjusted cash balance, 12/31/15...............$34,800

Adjusted cash balance, 12/31/15......$34,800

Market Securities

The company invested $52,000 in a portfolio of marketable securities on December 22, 2015. The portfolio\'s market value on December 31, 2015, had increase in value to $57,000.

Notes Receivable

On November 1, 2015, The Ski Factory sold 250 pairs of skis to Artic Lodge for $130,000. The lodge paid $10,000 at the point of sale and issued a one-year, $120,000, 5 percent note for the remaining balance. The note, plus accrued interest, is due in full on October 31, 2016. The Ski Factory adjusts for accrued interest revenue monthly.

Accounts Receivable

The Ski Factory uses a balance sheet approach to account for uncollectible accounts expense. Outstanding accounts receivable on December 31, 2015, total $900,000. After aging these accounts, the company estimates that their net realizable value is $870,000. Prior to making any adjustment to record uncollectible accounts expense, The Ski Factory\'s Allowance for Doubtful Accounts has a credit balance of $8,000.

Instructions:

a. Prepare the journal entry necessary to update the company\'s accounts immediately after performing its bank reconciliation on December 31, 2015.

b. Prepare the journal entry necessary to adjust the company\'s marketable securities to market value at December 31, 2015.

c. Prepare the journal entry necessary to accrue interest in December 2015.

d. Prepare the journal entry necessary to report the company\'s accounts receivable at their net realizable value at December 31, 2015.

e. Discuss briefly how the entry performed in part D affects the accounts receivable turnover rate. Does the write-off of an account receivable affect the accounts receivable turnover rate differently than the entry performed in part D? Explain.

Solution

a) Bank charges Dr 50                 Cash Cr 50 Accounts receivable Dr 750                Cash Cr 750 Cash Dr 468            Office supplies Cr 468 b) Market securities Dr 5000          Unrealized gain on market securities Cr 5000 c) Accrued Interest Dr 500           Accrued Income Cr 500 (120000*5%/12) d) Bad Debts expenses Dr 22000             Allowance for doubtful allowance Cr 22000 (900000-870000 = 30000 -8000 = 22000) e) Accounts receivable turnover rate = Net credit sales / Average receivables Hence the accounts turnover rate depends upon the averag receivables, hence if the average receivables increase the rate would decrease and vice versa Hence the method of accounting for alloeance for uncollectables is important to knoe the net receivables and thereby getting the accounts receivable ratio