On December 27, 2017, ABC sold merchandise on account with a selling price of $6,000 to XYZ Company. The terms of the sale were FOB destination. The goods, which had a cost of $4,000, were shipped on December 27, 2017 and were received by XYZ on January 3, 2018. ABC uses a periodic inventory system. ABC recorded the sale on December 27, 2017 and excluded the merchandise from the ending inventory. Determine the effect of this error on the financial statements for ABC for the year ended December 31, 2017:
*Hint: Remember that according to the Revenue Recognition Principle, you cannot record a revenue until the company has satisfied its performance obligation (in this case, delivered the goods.) Think about the term FOB Destination and what this means in terms of “when” title transfers and the timing of when the goods are considered “delivered”.
a.Total assets are understated by $4,000
b.Stockholder’s Equity is overstated by $2,000
c.Liabilities are understated by $4,000
d.Net Income is overstated by $6,000
On June 1, 2017, ABC Corp. invested $30,000 into a certificate of deposit for 9-months, earning 10% APR. ABC’s year end is December 31st. At year end, the appropriate adjusting journal entry was recorded to accrue interest. To record the appropriate journal entry on March 1, 2018 for receipt of principal plus interest at maturity, ABC Corp. would:
a.Credit Cash for $30,000
b.Credit Interest Revenue for $2,250
c.Credit Interest Receivable for $1,750
d.Debit “Investment in CD” for $30,000
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2) QUESTIONS:
At December 31, 2016, Shamrock, Inc. reported the following information on its balance sheet:
Accounts Receivable $850,000
Allowance for Doubtful Accounts 46,750 (credit)
During 2017 the company recorded sales of $3,125,000, of which 80% were on account. They had cash collections of their accounts receivable of $2,400,000 and wrote off as uncollectible $60,000 of accounts.
Determine the ending balance in the Accounts Receivables as of December 31, 2017: $____________________
USING THE INFORMATION PRESENTED IN #11, ABOVE, ANSWER THE FOLLOWING:
Assume Shamrock estimates bad debts based on 6% of the Accounts Receivables ending balance (as of Dec. 31, 2017). In order to record the appropriate year-end adjusting entry for bad debts, the company would:
a.Debit Bad Debt Expense for $53,400
b.Credit Allowance for Doubtful Accounts for $40,150
c.Credit Allowance for Doubtful Account for $6,650
d.Credit Allowance for Doubtful Accounts for $66,650.