Determine proper cash balance

Question

Question 1: (Determine Proper Cash Balance)

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below.

1. January cash receipts recorded in the December cash book totaled $45,640 of which $28,000 represents cash sales, and $17,640 represents collections on account for which cash discounts of $360 were given.

2. January cash disbursements recorded in the December check register liquidated accounts payable of $22,450 on which discounts of  $250 were taken.

3. The ledger has not been closed for 2014.

4. The amount shown as inventory was determined by physical count on December 31, 2014.

The company uses the periodic method of inventory.

Instructions:

(a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31.   

Dec 31, 14	Account Title				Amount
	Account Title				Amount
	Account Title					Amount
	Account Title					Amount
Dec 31, 14	Account Title				Amount
	Account Title				Amount
	Account Title					Amount

(b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.)

Assume that the balance sheet that was prepared by the company showed the following amounts:                       
                       

			Per Balance Sheet		After Adjustment
	Current assets		Debit	Credit	Debit	Credit
	Cash		$39,000		Amount
	Receivables		42,000		Amount
	Inventories		67,000		Amount
	Totals:		$148,000		Formula
	Current Liabilities
	Accounts Payable			$45,000		Amount
	Other Current Liabilities			14,200		Amount
	Totals:			$59,200		Formula
	Working capital			Formula		Formula
	Current ratio:		Formula	to 1	Formula	to 1

                       
Question 2: (Bad-Debt Reporting—Aging) Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and the Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding			Amount	Probability of Collection
Less than 16 days			$300,000	0.98
Between 16 and 30 days			100,000	0.90
Between 31 and 45 days			80,000	0.85
Between 46 and 60 days			40,000	0.80
Between 61 and 75 days			20,000	0.55
Over 75 days			15,000	0.00

Instructions:

(a) What is the appropriate balance for the Allowance for Doubtful Accounts at the year-end?

Days Account Outstanding			Amount	Probability of Collection		Doubtful Accts:
0-15 days			$300,000	0.98		Formula
16 - 30 days			100,000	0.90		Formula
31 - 45 days			80,000	0.85		Formula
46 - 60 days			40,000	0.80		Formula
61 - 75 days			20,000	0.55		Formula
Over 75 days			15,000	0.00		Formula
						Formula

(b) Show how Accounts Receivable would be presented on the balance sheet.

Account Title				Amount
Less: Account Title				Amount
Text Title					Formula

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Text Title					Amount
Text explanation as required.					Amount
Text Title					Formula