On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances:Accounts Debit CreditCash $ 11,200Accounts Receivable 34,000Allowance for Uncollectible Accounts $ 1,800Inventory 152,000Land 67,300Buildings 120,000Accumulated Depreciation 9,600Accounts Payable 17,700Common Stock 200,000Retained Earnings 155,400Totals $384,500 $384,500During January 2021, the following transactions occur:January 1 Borrow $100,000 from Captive Credit Corporation. The installment note bearsinterest at 7% annually and matures in 5 years. Payments of $1,980 are required atthe end of each month for 60 months.January 4 Receive $31,000 from customers on accounts receivable.January 10 Pay cash on accounts payable, $11,000.January 15 Pay cash for salaries, $28,900.January 30 Firework sales for the month total $195,000. Sales include $65,000 for cash and$130,000 on account. The cost of the units sold is $112,500.January 31 Pay the first monthly installment of $1,980 related to the $100,000 borrowed onJanuary 1. Round your interest calculation to the nearest dollar.Required:1. Record each of the transactions listed above.2. Record adjusting entries on January 31.a. Depreciation on the building for the month of January is calculated using the straightline method. At the time the building was purchased, the company estimated a service life of 10 years and a residual value of $24,000.b. At the end of January, $3,000 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 2% will not be collected. No accounts were written off as uncollectible in January.c. Unpaid salaries at the end of January are $26,100.d. Accrued income taxes at the end of January are $8,000.3. Prepare an adjusted trial balance as of January 31, 2021, after updating beginning balances (above) for transactions during January (requirement 1) and adjusting entries at the end of January (requirement 2).4. Prepare a multiple-step income statement for the period ended January 31, 2021.5. Prepare a classified balance sheet as of January 31, 2021. (Hint: The carrying value of notes payable on January 31, 2021 is $98,603; $17,411 is reported as notes payable in the current liabilities section and $81,192 is reported as notes payable in the long-term liabilities section ($17, 411 + $81,192 = $98,603).6. Record closing entries.7. Analyze the following for Freedom Fireworks:a. Calculate the debt to equity ratio. If the average debt to equity ratio for the industry is 1.0, is Freedom Fireworks more or less leveraged than other companies in the same industry?b. Calculate the times interest earned ratio. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry?c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
On January 1, 2021, the general ledger of Freedom Fireworks includes the following account balances:
Accounts Debit Credit
Cash $ 11,200
Allowance for Uncollectible Accounts $ 1,800
Inventory 152,000
Land 67,300
Buildings 120,000
Accumulated Depreciation 9,600
Accounts Payable 17,700
Common Stock 200,000
Retained Earnings 155,400
Totals $384,500 $384,500
During January 2021, the following transactions occur:
January 1 Borrow $100,000 from Captive Credit Corporation. The installment note bears
interest at 7% annually and matures in 5 years. Payments of $1,980 are required at
the end of each month for 60 months.
January 4 Receive $31,000 from customers on accounts receivable.
January 10 Pay cash on accounts payable, $11,000.
January 15 Pay cash for salaries, $28,900.
January 30 Firework sales for the month total $195,000. Sales include $65,000 for cash and
$130,000 on account. The cost of the units sold is $112,500.
January 31 Pay the first monthly installment of $1,980 related to the $100,000 borrowed on
January 1. Round your interest calculation to the nearest dollar.
Required:
1. Record each of the transactions listed above.
2. Record
a. Depreciation on the building for the month of January is calculated using the straightline method. At the time the building was purchased, the company estimated a service life of 10 years and a residual value of $24,000.
b. At the end of January, $3,000 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 2% will not be collected. No accounts were written off as uncollectible in January.
c. Unpaid salaries at the end of January are $26,100.
d. Accrued income taxes at the end of January are $8,000.
3. Prepare an adjusted
4. Prepare a multiple-step income statement for the period ended January 31, 2021.
5. Prepare a classified balance sheet as of January 31, 2021. (Hint: The carrying value of notes payable on January 31, 2021 is $98,603; $17,411 is reported as notes payable in the current liabilities section and $81,192 is reported as notes payable in the long-term liabilities section ($17, 411 + $81,192 = $98,603).
6. Record closing entries.
7. Analyze the following for Freedom Fireworks:
a. Calculate the debt to equity ratio. If the average debt to equity ratio for the industry is 1.0, is Freedom Fireworks more or less leveraged than other companies in the same industry?
b. Calculate the times interest earned ratio. If the average times interest earned ratio for the industry is 20 times, is the company more or less able to meet interest payments than other companies in the same industry?
c. Based on the ratios calculated in (a) and (b), would Freedom Fireworks be more likely to receive a higher or lower interest rate than the average borrowing rate in the industry?
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