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Chief financial officer for XYZ Corporation.
- Ahmed was recently hired as the chief financial officer for XYZ Corporation. At the time Ahmed was hired, the company had just completed the accounting cycle for the year ending December 31, 2017. Ahmed began his new job by reviewing the following information about sales and receivables activity during the year:
| Beginning accounts receivable | R.O 1,500,000 |
| Beginning allowance for uncollectible | 40,000 |
| Sales on account | 6,000,000 |
| Collections on account | 4,800,000 |
| Sales discounts | 68,000 |
| Accounts written-off | 33,000 |
| Additions to allowance for uncollectible accounts | 59,320
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- Based on his review, Ahmed prepared some handwritten notes in journal entry form summarizing the above sales, collections, discounts, write-offs, and additions to the allowance. he wanted to compare his entries to what had been recorded by the company. How should his summary entries appear?
- After completing his review, Ahmed concluded that, as of the end of 2018, the company should provide an Allowance for Uncollectible Accounts at the end-of-year balance equal to 3% of total gross receivables. Prepare summary journal entries for 2018 to capture the following information and to update the allowance account from its beginning-of-year balance (see part (a) to determine the beginning balance).
| Sales on account | 6,600,000 |
| Collections on account | 5,900,000 |
| Sales discounts | 88,000 |
| Accounts written-off | 53,000
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- XYZ is conducting an audit of the property, plant, and equipment records of AQA Corporation. XYZ selected two specific assets for closer inspection. XYZ has examined documentation related to each asset’s original purchase and compared it to the recorded cost, physically inspected the item to determine that it is still in the possession of the company and conducted other similar assurance procedures.
The final step in the audit of these accounts is to test the calculations of depreciation expense and accumulated depreciation. XYZ has asked you to perform this final procedure for 2018. Below is a schedule of the two assets, with the depreciation values determined by AQA. The building was depreciated by the straight-line method, and the truck by the double-declining balance method. Determine if the indicated depreciation values are correct.
| Item | Cost | Purchase Date | Service Life | Salvage Value | Depreciation Expense for 2018 | Accumulated Depreciation at 12/31/18 |
| Building | RO 1,200,000 | July 1, 2011 | 25 years | RO 400,000 | RO 32,000 | RO 256,000 |
| Truck | RO 80,000 | Oct. 1, 2016 | 8 years | RO 5,000 | RO 13,184 | RO 35,449
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- XYZ Corporation sells customized stage lighting equipment for use in the entertainment industry. XYZ has a broad dealer network. One dealer, Min Chen, obtained a large contract with a ship builder to install an elaborate stage lighting system produced by XYZ. The new cruise ship was being promoted as the Broadway on the Water and promised to offer the world’s finest theatrical performances at sea.
In 2012, XYZ sold the lighting equipment to Min Chen for R.O 30,000,000. Terms were 20% cash payment and the balance in 75 days. The extended payment terms were necessary because Min Chen needed to collect from the ship builder before being able to pay XYZ.
Unfortunately, Min Chen experienced difficulties. It seems the floor of the stage was equipped with a sophisticated leveling system that caused it to move in countermotion to the ship’s rocking while at sea. This feature provided entertainers with a stable stage on which to perform. However, this attribute was not considered in the design of the lighting equipment. As a result, when the ship rocked, the beams from the lights moved all about on the stage. No one was happy, and the cruise ship delayed payment to Min Chen. Min Chen was not able to pay XYZ. All parties believed some resolution and payment would eventually occur, but the timing was uncertain.
- Prepare XYZ’s journal entry to record the initial sale and down payment. Be sure to also record the cost of goods sold (assume the lighting equipment cost XYZ R.O 22,000,000 and the company uses a perpetual inventory system).
- After 75 days, Min Chen paid an additional R.O 4,000,000 and executed a 180- day, 6%, promissory note for the unpaid balance. Prepare XYZ’s entry.
- XYZ’s accounting year ended 60 days following the execution of the promissory note. Prepare the end-of-year adjusting entry.
- After 180 days following the execution of the promissory note, all matters had been resolved, and Min Chen paid the full amount due on the promissory note. Prepare XYZ’s journal entry.
- Why did XYZ obtain a promissory note from Min Chen in lieu of the open account receivable?
- Suppose the technical problems had been resolved early in 2013 by XYZ contributing R.O 500,000 toward the cost of a gyroscopic lighting control system that eliminated the motion problem. How would this affect XYZ’s profitability? Technically, when should this cost have been recognized?