Tutorial Test 6 – Accounts Receivable and the Full Accounting Process
Business context
BlueWave Office Supplies is a sole proprietorship that sells office materials to small and
medium-sized business customers on both cash and credit terms. During the current
accounting period, the owner expanded credit sales to attract more commercial clients. As
a result, Accounts Receivable has become a significant balance in the books, and
management is concerned not only with recording revenue correctly, but also with
assessing collectability, valuing receivables at cash realizable value, and reporting
meaningful information to investors and creditors.
At the end of the period, the owner asks the accountant to complete the full accounting
process and prepare the financial statements. Particular attention must be given to
Accounts Receivable, uncollectible accounts, bad debt expense, and the allowance for
doubtful accounts. In addition, management would like to evaluate how different
accounting methods affect reported income, the balance sheet, and investor decision-
making.
Opening balances at 1 January 2020
- Cash: $38,000
- Accounts Receivable: $24,000
- Allowance for Doubtful Accounts: $1,200 (credit)
- Inventory: $42,000
- Prepaid Insurance: $3,600
- Store Equipment: $85,000
- Accumulated Depreciation – Store Equipment: $18,000 (credit)
- Accounts Payable: $21,500 (credit)
- Wages Payable: $1,400 (credit)
- Owner, Capital: $151,700 (credit)
Transactions during the year ended 31 December 2020
1. Purchased inventory on account, $668,000.
2. Purchased additional inventory for cash, $322,000.
3. Made cash sales, $96,000.
4. Made credit sales, $1,200,000.
5. Collected cash from customers on account, $1,000,000.
6. Paid accounts payable, $155,000.
7. Paid wages expense, $98,000.
8. Paid rent expense, $24,000.
9. Paid utilities expense, $8,600.
10. Paid advertising expense, $11,400.
11. Paid delivery expense, $6,800.
12. The owner withdrew cash for personal use, $18,000.
13. The total cost of inventory sold during the year was $902,000.
Year-end adjustment information at 31 December 2020
1. Insurance expired during the year, $2,700.
2. Depreciation on store equipment for the year is $8,500.
3. Accrued wages at year-end, $2,100.
4. A customer account of $500 is determined to be uncollectible and should be
written off.
5. After the write-off in item 4, the ending Accounts Receivable balance must be
analysed using an ageing schedule. The company estimates uncollectible accounts
as follows:
Ageing schedule after write-off
- Not yet due: $80,500 × 1%
- 1–90 days past due: $74,500 × 4%
- 91–120 days past due: $30,000 × 10%
- 120–180 days past due: $5,000 × 15%
- Over 180 days past due: $10,000 × 30%
6. The owner wants to compare the above allowance estimate with an alternative
policy based on 1% of net credit sales.
7. The owner also wants to evaluate how the Income Statement and Balance Sheet
would differ if the company applied the direct write-off method instead of the
allowance method.
Required
Prepare the accounting records and financial statements for BlueWave Office Supplies for
the year ended 31 December 2020.
Your work must include:
1. General Journal, including all regular entries, adjusting entries, and closing entries.
2. General Ledger in running balance form, including all regular entries, adjusting
entries, and closing entries.
3. Unadjusted Trial Balance, Adjusted Trial Balance, and Post-closing Trial Balance.
4. Multi-step Income Statement.
5. Statement of Owner’s Equity.
6. Classified Balance Sheet.
7. Calculation of the following ratios and brief interpretation of each ratio for
investors:
- Accounts Receivable Turnover
- Days in Accounts Receivable
- Current Ratio
8. Using the Accounts Receivable data in this tutorial test, evaluate the financial
reporting effects of the following methods of accounting for uncollectible accounts:
- Allowance method using ageing of receivables
- Allowance method using percentage of sales
- Direct write-off method
Your answer must:
- calculate the effect of each method on bad debt expense, ending allowance for
doubtful accounts, net accounts receivable, and net income;
- compare how each method affects the Income Statement and the Balance Sheet;
and
- answer the following question:
Which method provides better information for investors evaluating credit risk and earnings
quality? Support your answer with numerical evidence from this tutorial test.
Mark allocation (Total: 100 marks)
- General Journal + General Ledger + Trial Balances: 30 marks
- Adjusting entries + A/R allowance calculations: 15 marks
- Financial statements (IS, SOE, BS): 20 marks
- Ratios and interpretation: 10 marks
- Comparison of methods and investor discussion: 10 marks
- Presentation standards: 15 marks
Breakdown for comparison of methods and investor discussion (10 marks)
- Correct calculations for the alternative methods: 4 marks
- Comparison of Income Statement and Balance Sheet effects: 3 marks
- Discussion of which method provides better information for investors: 3 marks
Presentation standards (15 marks)
- Clear account titles and correct classifications: 3 marks
- Appropriate formats for journals, ledgers, and statements: 3 marks
- Accurate cross-referencing / working structure: 3 marks
- Logical layout and professional presentation: 3 marks
- Consistent figures, neat working, and readable submission: 3 marks