Problem Set A Copeland Company had the following account balances at December 31

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Problem Set A Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Unadjusted Trial Balance Accounts receivable $1,400,000 Allowance for uncollectible accounts (credit balance) 22,000 Credit sales for 2016 1,950,000 Ending 12/31/2015 Balance in Accounts receivable on 1/1/2016 $1,200,000 Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016             24,000 Copeland is considering the following approaches for estimating bad debts for 2016: Option A: Based on 3% of credit sales Option B: Based on an aging of year-end accounts receivable Days Amount Outstanding Estimated % Uncollectible 0-30 $800,000 3% 31-60 300,000 6% 61-120 200,000 9% Over 120 100,000 24% $1,400,000 REQUIRED: 1 Do the adjusting journal entry under Option A and Option B. 2 What amounts would be reported on the 12/31/2016 financial statements related to Accounts Receivable under Option A and Option B? Make sure to include the effect on the Income Statement, Balance Sheet and Statement of Cash Flows (under the Direct AND Indirect Method), and the Statement of Stockholders' Equity. 3 What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B? 4 Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss Option A - Adjusting JE Option B - Adjusting JE Option A - Financial Statement Effects Income Statement Balance Sheet Statement of Cash Flows - Indirect: Statement of Cash Flows - Direct (Cash collected from customers): Statement of Stockholder's Equity Option B - Financial Statement Effects Income Statement Balance Sheet Statement of Cash Flows - Indirect: Statement of Cash Flows - Direct (Cash collected from customers): Statement of Stockholder's Equity Option A - AR Ratios Turnover CR Ratio Option B - AR Ratios Turnover CR Ratio Problem Set A Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Unadjusted Trial Balance Accounts receivable $1,400,000 Allowance for uncollectible accounts (credit balance) 22,000 Credit sales for 2016 1,950,000 Ending 12/31/2015 Balance in Accounts receivable on 1/1/2016 $1,200,000 Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016             24,000 Copeland is considering the following approaches for estimating bad debts for 2016: Option A: Based on 3% of credit sales Option B: Based on an aging of year-end accounts receivable Days Amount Outstanding Estimated % Uncollectible 0-30 $800,000 3% 31-60 300,000 6% 61-120 200,000 9% Over 120 100,000 24% $1,400,000 REQUIRED: 1 Do the adjusting journal entry under Option A and Option B. 2 What amounts would be reported on the 12/31/2016 financial statements related to Accounts Receivable under Option A and Option B? Make sure to include the effect on the Income Statement, Balance Sheet and Statement of Cash Flows (under the Direct AND Indirect Method), and the Statement of Stockholders' Equity. 3 What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B? 4 Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss Option A - Adjusting JE Option B - Adjusting JE Option A - Financial Statement Effects Income Statement Balance Sheet Statement of Cash Flows - Indirect: Statement of Cash Flows - Direct (Cash collected from customers): Statement of Stockholder's Equity Option B - Financial Statement Effects Income Statement Balance Sheet Statement of Cash Flows - Indirect: Statement of Cash Flows - Direct (Cash collected from customers): Statement of Stockholder's Equity Option A - AR Ratios Turnover CR Ratio Option B - AR Ratios Turnover CR Ratio

Explanation / Answer

Accounts Receivable 1400000 Allowance for uncollectible accounts (credit balance) 22000 Credit Sales for 2016 1950000 Ending 12/31/2015 Balance in accounts receivables on 01/01/2016 1200000 Balance in allowance for uncollectible accounts on 01/01/2016 24000 Option A : Based on 3% of credit sales 3%*1950000 58500 Option B: based on an aging of year-end accounts receivable Days Amount outstanding Estimated % uncollectible 0-30 $800,000 3% $24,000 31-60 300000 6% $18,000 61-120 200000 9% $18,000 over 120 100000 24% $24,000 $1,400,000 $84,000 If Option A is selected Accounts Receivable 1400000 Less : Allowance for uncollectible accounts -22000 -58500 Accounts Receivable 1319500 If Option B is selected Accounts Receivable 1400000 Less : Allowance for uncollectible accounts -22000 84000 Accounts Receivable 1462000 Option A - Financial Statement Effects Income Statement Debited in account statement by 58500 Balance Sheet Reduction from accounts receivable Statement of Cash Flows - Indirect: The net increase or decrease in receivables is added or subtracted from operating income Statement of Cash Flows - Direct (Cash collected from customers): Cash collect would be reduced since increase in bad debt expense Statement of Stockholder's Equity Decrease in retained earnings will reduce stockholder's Equity Option B Income Statement Debited in account statement by 58500 Balance Sheet Reduction from accounts receivable Statement of Cash Flows - Indirect: The net increase or decrease in receivables is added or subtracted from operating income Statement of Cash Flows - Direct (Cash collected from customers): Cash collect would be reduced since increase in bad debt expense Statement of Stockholder's Equity Decrease in retained earnings will reduce stockholder's Equity Option A Inventory Turnover 1950000/1319500 1.477832512 Credit Risk(58500+22000) 80500 1400000 5.75% Option B Inventory Turnover 1950000/1462000 1.33378933 Credit Risk(84000+22000) 106000 1400000 Credit Risk 7.57%

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