Acct 2210 Zeigler: P7-26A Solution – pg 398

Acct for Bad Debts (% of sales method), Credit Cards & Notes Receivable

Village Cycle Sales & Service
General Journal
Date / Account Titles / Debit / Credit
1. / Merchandise Inventory / 260,000
Accounts Payable / 260,000
2a. / Accounts Receivable / 340,000
Sales Revenue / 340,000
2b. / Cost of Goods Sold / 243,000
Merchandise Inventory / 243,000
3. / Cash / 80,000
Service Revenue / 80,000
4a. / Accounts Receivable - Credit Card Co. / 57,000
Credit Card Expense ($60,000 x 5%) / 3,000
Sales Revenue / 60,000
4b. / Cost of Goods Sold / 41,250
Merchandise Inventory / 41,250
5. / Cash / 348,000
Accounts Receivable / 348,000
6. / Accounts Payable / 265,000
Cash / 265,000
7. / Selling and Administrative Expenses / 115,000
Cash / 115,000
8. / Cash / 57,000
Accounts Receivable - Cr. Card Co. / 57,000
9. / Notes Receivable / 50,000
Cash / 50,000
10. / Allowance for Doubtful Accounts / 830
Accounts Receivable / 830
11a. / Interest Receivable1 / 1,125
Interest Revenue / 1,125
11b. / Uncollectible Accounts Expense2 / 1,700
Allowance for Doubtful Accounts / 1,700

1$50,000 x 9% = $4,500; $4,500 x 3/12 = $1,125 2$340,000 x .5% = $1,700

P7-26A (cont.) PAGE 2/4

Village Cycle Sales & Service
T-Accounts
Assets / = / Liabilities / + / Stockholders’ Equity
Cash / Accounts Payable / Common Stock
Bal. 46,200 / Bal. 28,000 / Bal. 80,000
3. 80,000 / 6. 265,000 / 6. 265,000 / 1. 260,000
5. 348,000 / 7. 115,000 / Bal. 23,000 / Retained Earnings
8. 57,000 / 9. 50,000 / Bal. 43,750
Bal. 101,200 / Bal. 43,750
Sales Revenue
Accounts Receivable / 2a. 340,000
Bal. 21,300 / 4a. 60,000
2a. 340,000 / 5. 348,000 / Bal. 400,000
10. 830
Bal. 12,470 / Service Revenue
3. 80,000
Accounts Receivable-CC / Bal. 80,000
4a. 57,000 / 8. 57,000
Bal. -0- / Cost of Goods Sold
2b. 243,000
Allow. For Doubt. Accts / 4b. 41,250
Bal. 1,350 / Bal. 284,250
10. 830 / 11b. 1,700
Bal. 2,220 / Credit Card Expense
4a. 3,000
Merchandise Inventory / Bal. 3,000
Bal. 85,600 / 2b. 243,000
1. 260,000 / 4b. 41,250 / Selling & Adm. Exp.
Bal. 61,350 / 7. 115,000
Bal. 115,000
Interest Receivable
11a. 1,125 / Uncollectible Accts. Exp.
Bal. 1,125 / 11b. 1,700
Bal. 1,700
Notes Receivable
9. 50,000 / Interest Revenue
Bal. 50,000 / 11a. 1,125
Bal. 1,125

P7-26A (cont.) PAGE 3/4

Village Cycle Sales and Service
Financial Statements
For the Year Ended December 31, 2013
Income Statement
Revenue / %
Sales Revenue / $400,000
Service Revenue / 80,000
Total Revenue / $480,000 / 100%
Cost of Goods Sold / (284,250) / (59%)?
Gross Margin (see note below) / 195,750 / 41% ?
Expenses
Credit Card Expense / $ 3,000
Selling & Adm. Expenses / 115,000
Uncollectible Accts. Exp. / 1,700
Total Operating Expenses / (119,700) / (25%)
Operating Income / 76,050 / 15.8%
Non-Operating Items
Interest Revenue (Income) / 1,125 / .3%
Net Income / $ 77,175 / 16.08%
Statement of Changes in Stockholders’ Equity
Beginning Common Stock / $80,000
Plus: Stock Issued / -0-
Ending Common Stock / $ 80,000
Beginning Retained Earnings / $43,750
Plus: Net Income / 77,175
Ending Retained Earnings / 120,925
Total Stockholders’ Equity / $200,925

Note: A Gross Margin of 41% is suspect here as “Service” revenue has been included in making this calculation. Analysts will recognize this and compute the Gross Margin considering only “Sales” Revenue compared to COGS. In this case, Gross Margin, for purposes of understanding the relationship between goods bought for resale and that revenue produced would be ~29% (($195,750-$80,000)/$400,000). COGS would equal ~71% ($284,250/$400,000).


P7-26A (cont.) PAGE 4/4

Village Cycle Sales and Service
Balance Sheet
As of December 31, 2013
Assets / %
Cash / $101,200 / 45%
Accounts Receivable / $12,470
Less: Allow. for Doubtful Accts. / (2,220) / 10,250 / 5%
Merchandise Inventory / 61,350 / 27%
Interest Receivable / 1,125 / ~ 1%
Notes Receivable / 50,000 / 22%
Total Assets / $223,925 / 100%
Liabilities
Accounts Payable / $ 23,000
Total Liabilities / $ 23,000 / 10%
Stockholders’ Equity
Common Stock / $ 80,000
Retained Earnings / 120,925
Total Stockholders’ Equity / 200,925 / 90%
Total Liab. Stockholders’ Equity / $223,925 / 100%
Village Cycle Sales and Service
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash Flows From Operating Activities:
Cash Receipts from Revenue* / $485,000
Cash Payment for Accounts Pay. (Inv.) / (265,000)
Cash Payments for Expenses / (115,000)
Net Cash Flow from Operating Activities / $105,000
Cash Flows From Investing Activities:
Cash Outflow for Notes Receivable / $ (50,000)
Net Cash Flow from Investing Activities / (50,000)
Cash Flows From Financing Activities / -0- -0-
Net Change in Cash / 55,000
Plus: Beginning Cash Balance / 46,200
Ending Cash Balance / $101,200

*Cash Receipts from Revenue:

Cash Sales $80,000

Collections of Accounts Rec. 348,000

Credit Card Sales Collections 57,000

Total Cash Receipts from Revenue $485,000