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Stern Corporation (A)
Author(s):
Reece, James S.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 2
Teaching Note: Available. 
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First Page and the Assignment Questions:

On December 31, 1998, before the yearly financial statements were prepared, the controller of the Stern Corporation reviewed certain transactions that affected accounts receivable and the allowance for doubtful accounts. The controller first examined the December 31, 1997, balance sheet (Exhibit 1). A subsequent review of the year’s transactions applicable to accounts receivable revealed the items listed below:

  1. Sales on account during 1998 amounted to $9,965,575.
  2. Payment received on accounts receivable during 1998 totaled $9,685,420.
  3. During the year accounts receivable totaling $26,854 were deemed uncollectible and were written off.
  4. Two accounts that had been written off as uncollectible in 1997 were collected in 1998. One account for $2,108 was paid in full. A partial payment of $1,566 was made by the Hollowell Company on another account that originally had amounted to $2,486. The controller was reasonably sure this account would be paid in full because reliable reports were circulating that the trustee in bankruptcy for the Hollowell Company would pay all obligations 100 cents on the dollar.
  5. The Allowance for Bad Debts was adjusted to equal 3 percent of the balance in Accounts Receivable at the end of the year.

Assignment

  1. Analyze the effect of each of these transactions in terms of its effect on Accounts Receivable, Allowance for Doubtful Accounts, and any other account that may be involved, and prepare necessary journal entries.
  2. Give the correct totals for Accounts Receivable and the Allowance for Doubtful Accounts as of December 31, 1998, after the transactions affecting them had been recorded.
  3. Calculate the current ratio, acid-test ratio, and days’ receivables figures as of December 31, 1998. Assume that amounts for items other than those described in the case are the same as on December 31, 1997.