One Trick Pony (OTP) incorporated and began operations near the end of the year, resulting in the following post-closing balances at December 31:
Cash $ 31,290
Accounts Receivable 13,800
Allowance for Doubtful Accounts 770*
Inventory 2,500
Deferred Revenue (40 units) 6,400
Accounts Payable 1,650
Notes Payable (long-term) 24,000
Common Stock 9,800
Retained Earnings 4,970
* credit balance.
The following information is relevant to the first month of operations in the following year:
OTP will sell inventory at $160 per unit. OTP’s January 1 inventory balance consists of 50 units at a total cost of $2,500. OTP’s policy is to use the FIFO method, recorded using a perpetual inventory system.
In December, OTP received a $6,400 payment for 40 units OTP is to deliver in January; this obligation was recorded in Deferred Revenue. Rent of $1,340 was unpaid and recorded in Accounts Payable at December 31.
OTP’s notes payable mature in three years, and accrue interest at a 10% annual rate.
January Transactions
Included in OTP’s January 1 Accounts Receivable balance is a $2,400 balance due from Jeff Letrotski. Jeff is having cash flow problems and cannot pay the $2,400 balance at this time. On 01/01, OTP arranges with Jeff to convert the $2,400 balance to a six-month note, at 10% annual interest. Jeff signs the promissory note, which indicates the principal and all interest will be due and payable to OTP on July 1 of this year.
OTP paid a $420 insurance premium on 01/02, covering the month of January; the payment is recorded directly as an expense.
OTP purchased an additional 200 units of inventory from a supplier on account on 01/05 at a total cost of $10,000, with terms n/30.
OTP paid a courier $400 cash on 01/05 for same-day delivery of the 200 units of inventory.
The 40 units that OTP’s customer paid for in advance in December are delivered to the customer on 01/06.
On 01/07, OTP received a purchase allowance of $1,600 on account, and then paid the amount necessary to settle the balance owed to the supplier for the 1/05 purchase of inventory (in c).
Sales of 60 units of inventory occurring during the period of 01/07–01/10 are recorded on 01/10. The sales terms are n/30.
Collected payments on 01/14 from sales to customers recorded on 01/10.
OTP paid the first 2 weeks’ wages to the employees on 01/16. The total paid is $3,080.
Wrote off a $880 customer’s account balance on 01/18. OTP uses the allowance method, not the direct write-off method.
Paid $2,680 on 01/19 for December and January rent. See the earlier bullets regarding the December portion. The January portion will expire soon, so it is charged directly to expense.
OTP recovered $340 cash on 01/26 from the customer whose account had previously been written off on 01/18.
An unrecorded $210 utility bill for January arrived on 01/27. It is due on 02/15 and will be paid then.
Sales of 70 units of inventory during the period of 01/10–01/28, with terms n/30, are recorded on 01/28.
Of the sales recorded on 01/28, 10 units are returned to OTP on 01/30. The inventory is not damaged and can be resold. OTP charges sales returns to a contra-revenue account.
On 01/31, OTP records the $3,080 employee salary that is owed but will be paid February 1.
OTP uses the aging method to estimate and adjust for uncollectible accounts on 01/31. All of OTP’s accounts receivable fall into a single aging category, for which 10% is estimated to be uncollectible. (Update the balances of both relevant accounts prior to determining the appropriate adjustment.)
Accrue interest for January on the notes payable on 01/31.
Accrue interest for January on Jeff Letrotski’s note on 01/31 (see a).
