Homework project 3A:

purpose: Practice determining how different types of sales and receivables transactions are handled according to US GAAP and how this impacts the companys financials year over year.

Below are a variety of transactions for a Washing Machine Company (WMC). They have traditional stores selling washing machines directly to customers and they also sell to other retailers such as Sears, Home Depot, etc. Occasionally they will receive long term special order contracts to be delivered over in a 1-2 year time frame (new apartment buildings etc.) Requirement 1: Complete the Financial Statement Impact Template For each of the transactions noted below, use the provided Financial Statement Impact Template to record the transactions and create final totals. Note that the template will have some beginning balances in the accounts that you may need to consider. 1 On Sept 4, WMC sold washing machines costing $30,000 for $38,000 on account. All sales are also recorded with a possible sales return which are estimated for 2% of each gross sale. 2 On Sept 18, WMC made an agreement to supply Home Depot with their newest washing machine model when it is ready. $25,000 cash was received from Home Depot for these future products but products will not be delivered until midOctober. 3 On Sept 30, WMC made their quarter end adjustment to the Allowance for Uncollectible Accounts. Management makes the adjustment every quarter end estimating that the allowance for uncollectible accounts should be at 4% of the current balance of Accounts Receivable. Please note that WMCs balance from last period in the Allowance for Uncollectible Accounts is $1450. This is shown the associated Homework Project Week 3 Template.xls. Requirement 2: Answer the following questions about the transactions your recorded a) In transaction 1, what is the purpose of recording the possibility of a sales return? b) Why does WMC record this in a separate account and not just reduce sales revenue directly? c) What if management did not record any estimate for the sales returns in transaction 1? What would be the impact on the Income Statement? Use financial numbers in your answer. d) In regard the allowance for uncollectible accounts. What if WMC decided to estimate this as 2.5% of the current balance of Accounts Receivable? What is the impact on the Balance Sheet? On the Income Statement? Use financial numbers in your answer. e) Assume that WMC has been approached by a local vacuum company who is requesting to display and sell vacuums in WMCs stores. Any unsold vacuums would be returned to the local company and WMC will earn a 4% commission on each sale. Describe how WMC will account for the sale of a vacuum in their revenue?

Date

Transaction

Amount

Balance Sheet

Assets

Liabilities

SE

Cash

AR

Allowance for Uncollectible Accounts

Allowance for Sales Returns

Inventory

Accts Pay

Deferred Revenue

Cont. Cap

RE

Beginning Balances

112,000

68,000

1,450

400

120,000

100

4,000

80,000

214,050

Date

Transaction

Amount

Balance Sheet

Assets

Liabilities

SE

Cash

AR

Allowance for Uncollectible Accounts

Allowance for Sales Returns

Inventory

Accts Pay

Deferred Revenue

Cont. Cap

RE

Beginning Balances

112,000

68,000

1,450

400

120,000

100

4,000

80,000

214,050

Income Statement
						Revenue	Sales Returns and Allowances	COGS	Other Revenue or Exp	Note Re: Rev or Exp	Net Income
0	0	0	0		0

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