wiggins-corporation-utilizes-an-accounting

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B-07.05

Allowance method: Aging of accounts
Wiggins Corporation utilizes an accounting software package that is capable of producing a detailed aging
of outstanding accounts receivable. Following is the aging schedule as of December 31, 20X2.
Spreadsheet
fx
A
1

B

C

Age

Amount Outstanding

2

0 to 30 days

3

31 to 60 days
61 to 120 days

200,000

5

Over 120 days

E

700,000

4

D

25,000

$1,200,000

6
Casper Wiggins has owned and operated Wiggins Corporation for many years and has a very good sense
of the probability of collection of outstanding receivables, based on an aging analysis. The following table
reveals the likelihood of collection:

Spreadsheet
fx
A
1

B

Age

Probability of Collection

2

0 to 30 days
31 to 60 days
61 to 120 days

75%

5

Over 120 days

E

90%

4

D

98%

3

C

50%

6

(a)

Prepare an aging analysis and show how accounts receivable and the related allowance for
uncollectibles should appear on the balance sheet at December 31.

(b)

Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the
balance prior to preparing the aging was a $15,000 credit.

(c)

Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the
balance prior to preparing the aging was a $5,000 debit. How could the allowance account have
contained a debit balance?

B-07.06

Allowance method: Percentage of sales
Morrison Supply sells pressured air devices that assist patients with breathing disorders during sleep. These
devices are delivered to patients immediately upon completion of a diagnostics exam, and are subsequently
billed to insurance companies. Insurance companies sometime refuse to pay and/or only agree to a reduced
price. Patients are then responsible for any amount denied by the insurance company, but are often unable
or unwilling to pay. Because clinical standards of cleanliness must be maintained, Morrison is unable to accept returns for resale to others.
Morrison is reluctant to litigate to collect unpaid amounts. As a result, Morrison experiences a high rate of
uncollectible accounts, and prepares a monthly adjusting entry for uncollectibles that is equal to 20% of sales.
Morrison’s Monthly sales and write-offs for the first quarter of 20X7 follow:
MONTH

SALES

ACTUAL WRITEOFFS

January

$630,000

$100,000

February

$480,000

$ 80,000

March

$590,000

$140,000

(a)

Prepare monthly journal entries to summarize sales on account, the recording of the provision for
uncollectibles, and the actual write-offs.

(b)

The provision for uncollectibles is established at 20% of sales. Why are the monthly write-offs not
also proportional to that month’s sales? Does the amount written off in a particular month impact
net income for that month?

Monitoring receivables: Analysis and ratios
Supreme Vacuum uses television advertising blitzes to generate consumer interest in its highly-touted floor
cleaners. Customers are directed to a website for more information. Once on the website, customers are constantly confronted with a "video game" where they can use icon-like vacuums to suck up coupons that float
on and off their browser windows. At check out, customers are able to clean the contents of their imaginary
vacuums and select one of the coupons to apply against their purchase.
The best coupon is a no-moneydown, 4-equal-monthly-payments, coupon. "Magically", every customer will
find at least one of these coupons. Virtually all customers will use this coupon in making their final purchases.
As a result, Supreme carries a substantial balance in accounts receivable. It is imperative that Supreme manage
credit risk, and careful attention is paid to the "accounts receivable turnover ratio" and the "days outstanding."
During 20X5, net credit sales were $6,000,000. The sales were evenly spread throughout the year.
The beginning-of-year net realizable value of accounts receivable was $2,150,000 and the end-of-year balance was $2,650,000.

B-07.08

(a)
(b)

Evaluate the information from part (a) and determine if Supreme’s customer base is in compliance
the 4-equal-monthly payments agreement.

(c)

B-07.10

Calculate the "accounts receivable turnover ratio" and the "days outstanding."

In addition to the facts above, suppose Supreme ran a major holiday sales campaign in December
of 20X5. This campaign promised no payments until 20X6! This campaign generated an additional
$3,000,000 in credit sales (and resulted in an end-of-year receivable balance of $5,650,000). Can
Supreme record these sales under generally accepted accounting principles, and what is the impact
on the ratios (compared to the values you computed in part (a))?

Notes receivable interest calculations
Vinay Sanja was interviewing for a job at the State Bank of India. The bank requires all job applicants to take a
competency test on basic money mathematics. Vinay has completed the interest calculations portion of the
exam. Following are his questions and answers. Vinay must correctly answer in at least 3 cases to be eligible
for the job. Evaluate and correct Vinay’s answers. Does he qualify for the job?

(a)

Assume the bank holds a 400,000 Indian Rupee (INR) note receivable dated June 1, 20X1. This note
matures on August 31, 20X1. This note is written to assume a 360 day year and 30 day months. The
annual interest rate is stated at 10%. What is the maturity value of the note, including interest?
Answer: 400,000 X 10% X 60/360 =
6,666.67
400,000 + 6,666.67 = 406,666.67

(b)

Assume the bank holds a INR 400,000 note receivable dated June 1, 20X1. This note matures on
August 31, 20X1. This note is written to assume a 365 day year and actual days outstanding are used
in all calculations. The annual interest rate is stated at 10%. What is the maturity value of the note,
including interest?
Answer: 400,000 X 10% X 92/365 =
10,082.19

(c)

Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures
on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual
interest rate is stated at 8%. How much interest income should the bank record for its accounting
year ending December 31, 20X5?

Answer: Zero, the note is not due until 20X6

(d)

Assume the bank holds a INR 1,000,000 note receivable dated October 1, 20X5. This note matures
on September 30, 20X6. This note is written to assume a 360 day year and 30 day months. The annual
interest rate is stated at 8%. How much interest income should the bank record for its accounting
year ending December 31, 20X6?
Answer: 1,000,000 X 8% X 270/360 =
600,000

B-08.02

x

Consigned inventory
Sid Breman Art Gallery operates a retail store in Florida. All art displayed in the gallery is available for purchase.
Much of the art is owned by the gallery. However, there are also works on display that belong to other artists.
When the consigned art is sold, Sid remits 75% of the proceeds to the creator and retains a 25% commission.
Art belonging to the gallery is marked to sell at 200% of cost.

SPREADSHEET Following is a complete list of art on display in the gallery, along with the retail selling price.
TOOL:
Check boxes

NAME

SELLING PRICE

OWNERSHIP

See Shining Sea

$ 2,500

Gallery

Mermaids
Big Fish

1,800

Artist

910

Gallery

Shells At Dawn

3,000

Gallery

Sand Forever

1,090

Gallery

Development!

4,200

Artist

Taking a Chance

20,000

Gallery

Tides and Moons

500

Gallery

Mystery Sea

1,200

Gallery

On the Beach

1,650

Artist

Too Much Sun

4,775

Artist

Spring Break

5,000

Artist

Inland

7,880

Gallery

Alligators Return

19,720

Artist

Frost and Farm

14,300

Gallery

(a)

Identify if Sid Breman Art Gallery is the consignor or the consignee. Should the consigned inventory
be reported on the balance sheet of the gallery? What special accounting/control challenges are
presented by the existence of consigned inventory?

(b)

Determine the correct inventory valuation to be reported by the gallery.

B-08.04

Basic "periodic" calculations for inventory, FIFO, LIFO, average cost
Patti Devine owns Devine Decorating. One of her most popular items is the Remind-a-Chime digital clock. This
programmable clock issues "voice-based" reminders of important events like birthdays, anniversaries, etc.
Following is the Remind-a-Chime inventory activity for January. The clocks on hand at January 1 had a unit
cost of $140.
Date

Purchases

Sales

1-Jan
5-Jan

40
60 units @ $150 each

16-Jan
23-Jan
28-Jan

Units on Hand
100

70 units @ $255 each
90 units @ $170 each

30
120

55 units @ $295 each

65

(a)

If Devine uses the first-in, first-out (FIFO) inventory method (periodic approach), what values
would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(b)

If Devine uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would
be assigned to ending inventory and cost of goods sold? How much is gross profit?

(c)

If Devine uses the weighted-average inventory method (periodic approach), what values would be
assigned to ending inventory and cost of goods sold? How much is gross profit?

B-08.07

Specific identification method
Park Place Luxury Autos uses the specific identification method to value its inventory. Below is a listing of
automobiles that were either in beginning inventory or acquired during the year:
Automobile

Date Acquired

Cost

Bentley

Beginning inventory

$120,000

Rolls Royce

Beginning inventory

160,000

January

40,000

March

50,000

Land Rover

June

60,000

Jaguar

July

42,000

Porsche

September

75,000

Mercedes

November

85,000

BMW

December

64,000

Infiniti

December

39,000

Cadillac
Lexus

Park Place uses the specific identification method. Total sales during the year were $600,000. Automobiles
in ending inventory were the Rolls Royce, Lexus, Jaguar, and BMW. Determine the ending inventory, cost of
goods sold, and gross profit for Park Place.

B-08.09

Gross profit estimation technique
Aurora Wedding Gowns was burglarized in May of 20X5. It is unclear how many dresses were stolen. Aurora
and its insurance company are currently working to estimate the dollar value of the stolen goods in order to
reach a financial settlement under the existing property insurance policy.
Aurora’s tax return prepared at the end of 20X4 revealed that the company ended 20X4 with a total inventory of $189,000. Aurora uses the same inventory accounting methods for tax and accounting purposes.
The insurance company has contacted Aurora’s suppliers and confirmed Aurora’s claim that purchases for
20X5, prior to the date of the burglary, were $376,000. All inventory was purchased, FOB destination.
20X5 Sales taxes collected by Aurora and remitted to the state, prior to the date of the theft, were $48,000.
The sales tax rate is 6% of sales.
An inventory was taken immediately after the burglary and the cost of dresses in stock was $123,000.
Aurora consistently sells dresses at a gross profit margin of 45%.
Use the gross profit method to estimate the dollar value of stolen dresses.

1
2

5

B-09.05

Bond investment purchased at par
Beckwith Boots invested $100,000 in 5-year bonds issued by Ace Brick Company. The bonds were purchased
at par on January 1, 20X1, and bear interest at a rate of 8% per annum, payable semiannually.
(a)

Prepare the journal entry to record the initial investment on January, 20X1.

(b)

Prepare the journal entry that Beckwith would record on each interest date.

(c)

Prepare the journal entry that Beckwith would record at maturity of the bonds.

(d)

How much cash flowed "in" and "out" on this investment, and how does the difference compare to
total interest income that was recognized?

Bond investment purchased at a premium

B-09.06

Devol Computing invested in $100,000 of face amount of 6-year bonds issued by Horton Micro Chip Company
on January 1, 20X1. The bonds were purchased at 103, and bear interest at a stated rate of 8% per annum,
payable semiannually.
(a)

Prepare the journal entry to record the initial investment on January, 20X1.

(b)

Prepare the journal entry that Devol would record on each interest date.

(c)

Prepare the journal entry that Devol would record at maturity of the bonds.

(d)

How much cash flowed "in" and "out" on this investment, and how does the difference compare
to total interest income that was recognized?

Bond investment purchased at a discount
Petersen Stores invested in $100,000 of face amount of 4-year bonds issued by Erik Food Supply Company
on January 1, 20X1. The bonds were purchased at 98, and bear interest at a stated rate of 8% per annum,
payable semiannually.
(a)

Prepare the journal entry to record the initial investment on January, 20X1.

(b)

Prepare the journal entry that Petersen would record on each interest date.

(c)

Prepare the journal entry that Petersen would record at maturity of the bonds.

(d)

How much cash flowed "in" and "out" on this investment, and how does the difference compare
to total interest income that was recognized?

B-09.07

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