Question

c. Explain why We replace it with an interest-bearing note. The Ski Factory provided the following information at December 31, year 1. LO7-1, L07-3, LO7-4, LO7-5. LO7-6, LO7-7, LO7-8 PROBLEM 7.7A Short Comprehensive Problem Bank Reconciliation Bank statement balance, 12/31/year 1 ................. $32,612 Deposits in transit................ 4,900 Outstanding checks .............. (2.712) General ledger cash balance. 12/31/year 1 ..... $35.132 Bank service charge............. (50) Returned customer checks marked NSF (750) Error in recording of office supplies.. 468 Adjusted cash balance, 12/31/year 1 ....... $34,800 Adjusted cash balance, 12/31/year 1............ $34,800 Marketable Securities The company invested $52,0x30 in a portfolio of marketable securities on December 22. year 1. The portfolio's market value on December 31, year 1, had increased in value to $57,000. Notes Receivable On November 1, year 1, The Ski Factory sold 250 pairs of skisto Arctic 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, year 2. The Ski Factory adjusts for accrued interest revenue monthly. Accounts Recelvable The Ski Factory uses a balance sheet approach to account for uncollectible accounts expense. Out standing accounts receivable on December 31, year 1, 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 . Prepare the journal entry necessary to update the company's accounts immediately after per forming its bank reconciliation on December 31, year 1.

Can someone explain this please?

Answer 1

a. Journal entries after performing bank reconciliation

S.No.	Date	particulars	debit	credit
1	12/31/year1	Bank charges A/c Dr	50
		To cash/bank A/c		50
2	12/31/year1	Accounts Receivable A/c. Dr	750
		To cash/bank A/c		750
3	12/31/year1	cash/bank A/c. Dr	468
		To account payable		468

b. Journal entry to adjust the company's marketable securities to market value

S.no.	Date	particulars	debit	credit
1	12/31/year1	Marketable securities A/c. Dr ( Short term investment)	5000
		To unrealised gain A/c ( Income statement)		5000

Market value of securities is $57,000 on 31st December whereas the invested value is $52,000, thereof unrealised gain of $5,000 is recognized in profit and loss account.

c. Journal entry to record accrue interest in December, year1

S.No.	Date	particulars	Debit	Credit
1	12/31/year1	Interest Receivable A/c. Dr	500
		To interest income		500

There is a sale of $130,000 to Arctic lodge. Out of which $10,000 has been paid by Arctic lodge, the remaining balance is $120,000.

Interest monthly = $120,000×5%×1/12= $500.

d. Journal entry to record company's accounts receivable at net realisable value

S.no.	Date	particulars	Debit	Credit
1.	12/31/year1	Bad debts expenses A/c. Dr	22,000
		To Allowance for uncollectible accounts A/c		22,000

Outstanding account receivable $900,000

- net realisable value $870,000

Allowance for uncollectible accounts. $ 30,000

- Existing allowance for doubtful accounts. $ 8,000

Allowance for doubtful accounts to be made $ 22,000

e. Generally the account receivable turnover rate is defined as net sales divided by average account receivable.

Average account receivable is the sum of net opening and closing accounts receivable divided by 2.

Net opening accounts receivable = opening receivable - Allowance for uncollectible accounts.

Net closing accounts receivable = closing accounts receivable- Allowance for uncollectible accounts.

Therefore it can be said that allowance for doubtful accounts lead to increase in accounts receivable turnover rate.

As the entry passed in part d is allowance for doubtful accounts, it leads to increase in accounts receivable turnover rate.