Geary, Inc. had the following sales during Year 1:
Geary also had the following beginning and ending balances in the following accounts:
Geary, who uses the allowance method, estimated that 3% of the credit sales will go uncollected. The credit card company charges Geary a 4% fee for handling credit card transactions.Required:a) Prepare the adjusting entry for uncollectible accounts expense in general journal form. b) Prepare the entry to record the credit card sales in general journal form.c) Determine the amount of net cash
flows from operating activities during Year 1.
What will be an ideal response?
c) $5,300,000
a) The adjusting entry to recognize uncollectible accounts expense includes a credit to allowance for doubtful accounts (to increase the allowance for doubtful accounts, a contra asset account) and a debit to uncollectible accounts expense (to increase that expense account for $36,000, calculated as follows:
Uncollectible accounts expense = Credit sales of $1,200,000 credit sales × 3% = $36,000
b) The entry to record the credit card sales includes a credit to sales for $4,000,000, a debit to credit card expense for $160,000 (or $4,000,000 × 4%), and a debit to accounts receivable-credit card company for the difference of $3,840,000.
c)
| Net cash flow from operating activities: | ? | |
| Cash sales | $ 240,000 | (given) |
| Credit sales | 1,260,000 | (see below) |
| Credit card sales | 3,800,000 | (see below) |
| Total | $5,300,000 | ? |
| ? | ? | ? |
Ending accounts receivable of $180,000 = Beginning accounts receivable of $240,000 + Credit sales of $1,200,000 ? Collections on account (the unknown)
Collections on account = $240,000 + $1,200,000 ? $180,000 = $1,260,000
Ending accounts receivable-credit card company of $840,000 = Beginning accounts receivable-credit card company of $800,000 + Credit card sales of $4,000,000 ? Collections on account (the unknown) ? Credit card fees of $160,000 (from part b)
Collections on account = $800,000 + $4,000,000 ? $160,000 ? $840,000 = $3,800,000
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