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Problem 3

At the end of 2019, Geisel, Inc has a $1,200 debit balance in the Allowance for Doubtful Accounts, before adjusting entries were prepared. Credit sales for 2019 totaled $510,000. Sales returns for 2019 were $10,000. Credit Sales for 2018 were $610,000. Sales returns for 2018 were $10,000. The following aging analysis of Accounts Receivable was prepared at December 31, 2019:

Age Classification	12/31/19 $ Amount	Estimated % Uncollectible
Current/not yet due	110,000	1%
1-30 days past due	15,000	2%
31-60 days past due	10,000	6%
61-90 days past due	5,000	12%
over 90 days past due	8,000	30%
Total	$148,000

Required:

1. Prepare the December 31, 2019 adjusting entry using the aging analysis approach to estimate bad debts.

Dr.

Cr.

Problem 3 continued

2. Calculate the accounts receivable turnover ratio and the days to collect for 2018 and 2019 (round each calculation to one decimal place). The net receivables balance reported on the companys 12/31/17 financial statements was $113,000. The net receivables balance reported on the 12/31/18 financial statements was $127,000.

2019

2018

Discuss the implications of the receivables turnover ratio and days to collect as calculated in part b. Discuss possible reasons for any changes in the calculations.

Problem 4

Rent A Car, Inc. (RAC) purchased 100 vehicles on January 1, 2020, spending $2 million plus 11 percent total sales tax for a total cost of $2,220,000. RAC expects to use the vehicles for five years and then sell them for approximately $360,000. RAC anticipates the following average vehicle use over each year ended December 31:

	2020	2021	2022	2023	2024
Kilometers per year	15,000	20,000	10,000	10,000	5,000

To finance the purchase, RAC borrowed $1.8 million by signing a 6% promissory note. The note is to be repaid in full by December 31, 2024. On December 31 of each year, RAC makes one payment on the installment note comprising blended interest and principal components. The amortization schedule for the note is presented below. RAC has a December 31 year-end. The company does not make monthly adjustments, but rather makes adjusting entries every quarter.

The note carries loan covenants that require RAC to maintain a minimum times interest earned ratio of 3.0. RAC forecasts that the company will generate the following sales and preliminary earnings (prior to recording depreciation on the vehicles and interest on the note). For purposes of this question, ignore income tax.

	2020	2021	2022	2023	2024
Sales Revenue	$2,000,000	$2,500,000	$2,800,000	$2,900,000	$3,000,000
Income before depreciation and interest expense	1,000,000	800,000	900,000	1,200,000	1,100,000

Required:

1. Assuming the company makes the required annual payments on December 31, use the amortization schedule to determine:
   1. The amount of the annual payment
   2. The total interest and principal paid over the notes life

Problem 4 continued on the next page.

Problem 4 continued

2. What portion of the Note Payable balance would be reported as current versus noncurrent on the December 31, 2021, balance sheet? Fill-in the two blanks below.

Note Payable, Current $

Note Payable, Noncurrent

3. Calculate the depreciation expense that would be recorded in 2020 and 2021, using the (a) straight-line, (b) double-declining balance, and (c) units-of-production depreciation method. [5 marks]

2020 2021

a) straight line:

b) double-declining balance:

c) units-of-production:

Problem 4 continued

4. Using the information provided and your answers to requirement 3, determine net income and the loan covenant ratio in 2020 and 2021, assuming the company chooses the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method. [6 marks]

2020 2021

a) straight line:

Net Income =

Times Interest Earned Ratio =

b) double-declining balance:

Net Income =

Times Interest Earned Ratio =

c) units-of-production:

Net Income =

Times Interest Earned Ratio =

5. Using your answers to requirement 4, indicate whether the loan covenant would be violated under the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.
6. If the loan covenant is violated at any point in requirement 5, what can the company do to make sure they are not offside?

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