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Francis Equipment Co. closes its books regularly on December 31, but at the end of 2020 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 2020.

  4. The amount shown as inventory was determined by physical count on December 31, 2020,

The company uses the periodic method of inventory.


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

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:

DebitCreditCash  $39,000Accounts Receivable42,000Inventory67,000Accounts payable$45,000Other current liabilities14,200\begin{array} {lrr} &\underline{\hspace{10pt}\text{Debit}\hspace{10pt}}&\underline{\hspace{10pt}\text{Credit}\hspace{10pt}}\\ \text{Cash}\hspace{5pt} \ &\ \text{\$39,000}&\text{}\\ \text{Accounts Receivable}\hspace{5pt}& \text{42,000}&\text{}\\ \text{Inventory}\hspace{5pt} & \text{{\hspace{14pt}{67,000}}}&\text{{{}}}\\ \text{Accounts payable}\hspace{5pt} & \text{} &\text{\$45,000}\\ \text{Other current liabilities}\hspace{5pt} & \text{{\hspace{14pt}{}}}&\text{{\hspace{14pt}{14,200}}}\\ \end{array}


The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron Pub for the years ended December 31, 2019 and 2020.

December 31, 2019 December 31. 2020
Cash $2,000 $1,685
Accounts receivable 46,000 ?
Allowance for doubtful accounts 550 ?
Other current assets 8,500 7,925
Current liabilities 37,000 44,600
Total credit sales 205,000 255,000
Collections on accounts receivable 190,000 228,000

Flatiron management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.

  1. The cash reported at December 31, 2020, reflects the following items: petty cash $1,575 and postage stamps$110. The other current assets balance at December 31, 2020, includes the checking account balance of $4,000.

  2. On November 30, 2020, Flatiron agreed to accept a 6-month,$5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction.

  3. Flatiron factored some accounts receivable at the end of 2020, It transferred accounts totaling$10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron's customers and will retain 2% of the balances. Final Factor assesses Flatiron a finance charge of 3% on this transfer. The fair value of the recourse liability is $400. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.

  4. Flatiron charged off uncollectible accounts with balances of$1,600. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.


a. Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allow- ance for Doubtful Accounts at December 31, 2020.

b. Prepare the current assets section of The Flatiron Pub's balance sheet at December 31, 2020.


a. Compute Flatiron's current ratio and accounts receivable turnover for December 31, 2020. Use these measures to analyze Flatiron's liquidity. The accounts receivable turnover in 2019 was 4.37.

b. Discuss how the analysis you did above of Flatiron's liquidity would be affected if Flatiron had trans- ferred the receivables in a secured borrowing transaction.


What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables ap- proach at December 31, 2020?


Answered 1 year ago
Answered 1 year ago
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This exercise will help Flatiron Pub analyze the current assets section of its balance sheet and evaluate its accounts receivable.

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