Case 7 don’t leave your hand in the cookie jar

Guang zeng

Question (1) Give the journal entries for: bad debt adjustment and actual bad

debt charge offs; estimated product returns and actual product returns;

estimated warranty expense and actual warranty expense; receiving payment

for a maintenance service contract and recognizing sales over the contract

period.

a. Journal entries for bad debt adjustment and actual bad debt charge offs:

04/12/31 Actual bad debt charge offs 937,500

Deferred bad debt (187,500)
Bad debt adjustment 1,125,000

03/12/31 Actual bad debt charge offs 750,000

Deferred bad debt (75,000)
Bad debt adjustment 825,000

02/12/31 Actual bad debt charge offs 575,000

Deferred bad debt 0
Bad debt adjustment 575,000

b. Journal entries for estimated product returns and actual product

returns:

04/12/31 Actual product returns 187,500

Deferred product returns (187,500)
Estimated product returns 375,000

03/12/31 Actual product returns 150,000

 Deferred product returns (150,000)
Estimated product returns 300,000

c. Journal entries for estimated warranty expense and actual warranty

expense:

04/12/31 Actual warranty expense 281,250

Deferred warranty expense (93,750)
Estimated warranty expense 375,000

03/12/31 Actual warranty expense 225,000

Deferred warranty expense (75,000)
Estimated warranty expense 300,000

02/12/31 Actual warranty expense 115,000

Deferred warranty expense (115,000)
Estimated warranty expense 230,000

d. Journal entries for receiving payment for a maintenance service

contract and recognizing sales over the contract period:

Date Receiving payment for a maintenance service X

contract
Deferred maintenance sales X
Maintenance sales X

Question (2) For the bad debt estimate the controller used 2.5%, 2.75%, and

3% of product sales for 2002-2004. The assistant controller argues for a

steady 2.5% over the three years. Calculate the difference or excess of bad

debt estimate versus the experienced charge offs for 2002-2004.

2004 2003 2002

Sales $37,500,000 $30,000,000 $23,000,000
Estimated debt $1,125,000 $825,000 $575,000
expense
Actual debt $937,500 $750,000 $575,000

expense
Difference $187,500 $75,000 $0

Question (3) The controller instituted a product return estimate of 1% of sales

in 2003, the year of the new Turbo product. He repeated the 1% estimate in

2004, while the assistant controller sees only a 1/2 of 1% return experience.

Calculate the difference or excess of product return estimates versus the

experienced returns for 2003 and 2004.

2004 2003
Sales $37,500,000 $30,000,000
Estimated product return $375,000 $300,000
Actual product return $187,500 $150,000
Difference $187,500 $150,000

Question (4) In 2002 the actual warranty expense equaled the estimate of ½

of 1% of product sales. In 2003 when the new Turbo product line was

introduced, the controller doubled the warranty expense estimate to 1% of

product sales and kept it at 1% in 2004. The actual warranty expense

increased in 2003 and 2004 up to ¾ of 1%. Calculate the difference or excess

of warranty expense estimate versus the actual warranty expense for 2003

and 2004.

2004 2003
Sales $37,500,000 $30,000,000
Estimated warranty $375,000 $300,000
Actual warranty $281,250 $225,000
Difference $93,750 $75,000
Question (5) The maintenance service contracts totaled $1,440,000 yearly or

$120,000 per month for 2004. Set up the controller’s schedule in which

maintenance contracts are totaled at the end of the quarter ($360,000) and all

contracts are assumed to be signed on the last day of the quarter. The

controller’s method shows no service revenue in the actual quarter of contract

sale, and then recognizes revenue uniformly over the following four quarters.

04/3/31 Maintenance sales recorded 0

04/6/30 Maintenance sales recorded 90,000
04/9/30 Maintenance sales recorded 180,000
04/12/31 Maintenance sales recorded 270,000
05/3/31 Maintenance sales recorded 360,000
05/6/30 Maintenance sales recorded 360,000
05/9/30 Maintenance sales recorded 360,000
05/12/31 Maintenance sales recorded 360,000

Set up a second schedule for the assistant controller’s method of showing

monthly contracts of $120,000. This second method assumes all contract

sales take place on the last day of the month, with revenue recognized

uniformly over the next twelve months.

04/1/31 Maintenance sales recorded 0

04/2/28 Maintenance sales recorded 10,000
04/3/31 Maintenance sales recorded 20,000
04/4/30 Maintenance sales recorded 30,000
04/5/31 Maintenance sales recorded 40,000
04/6/30 Maintenance sales recorded 50,000
04/7/31 Maintenance sales recorded 60,000
04/8/31 Maintenance sales recorded 70,000
04/9/30 Maintenance sales recorded 80,000
04/10/31 Maintenance sales recorded 90,000
04/11/30 Maintenance sales recorded 100,000
04/12/31 Maintenance sales recorded 110,000
05/1/30 Maintenance sales recorded 120,000
05/2/28 Maintenance sales recorded 120,000
05/3/31 Maintenance sales recorded 120,000
05/4/30 Maintenance sales recorded 120,000
05/5/31 Maintenance sales recorded 120,000
05/6/30 Maintenance sales recorded 120,000
05/7/31 Maintenance sales recorded 120,000
05/8/31 Maintenance sales recorded 120,000
05/9/30 Maintenance sales recorded 120,000
05/10/31 Maintenance sales recorded 120,000
05/11/30 Maintenance sales recorded 120,000
05/12/31 Maintenance sales recorded 120,000

What is the difference in revenue recognized between the two methods of

showing deferred maintenance contract sales?

04/1/31 Controller’s method: record quarterly 0

Assistant controller’s method: record monthly 0
Difference of deferred maintenance contract sales 0
04/2/28 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 10,000
Difference of deferred maintenance contract sales (10,000)
04/3/31 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 20,000
Difference of deferred maintenance contract sales (20,000)
04/4/30 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 30,000
Difference of deferred maintenance contract sales (30,000)
04/5/31 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 40,000
Difference of deferred maintenance contract sales (40,000)
04/6/30 Controller’s method: record quarterly 90,000
Assistant controller’s method: record monthly 50,000
Difference of deferred maintenance contract sales 40,000
04/7/31 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 60,000
Difference of deferred maintenance contract sales (60,000)
04/8/31 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 70,000
Difference of deferred maintenance contract sales (70,000)
04/9/30 Controller’s method: record quarterly 180,00

0
Assistant controller’s method: record monthly 80,000
Difference of deferred maintenance contract sales 100,000
 04/10/31 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 90,000
Difference of deferred maintenance contract sales (90,000)
04/11/30 Controller’s method: record quarterly 0
Assistant controller’s method: record monthly 10,000
Difference of deferred maintenance contract sales (10,000)
04/12/31 Controller’s method: record quarterly 270,00

0
Assistant controller’s method: record monthly 11,000
Difference of deferred maintenance contract sales 259,000

Question (6) What is the accumulated difference for the two approaches for

bad debt, product returns, warranty, and deferred maintenance service

contracts?

Bad debt Product returns Warranty Deferred maintenance service

contract
Controller’s 1,125,00 375,000 375,000 540,000

method 0
Assistant 937,500 187,500 281,250 660,000

controller’s

method
Difference 187,500 187,500 93,750 (120,000)
Accumulated 348,750

difference

Question (7) Whose arguments are more persuasive or with whom do you

agree?
I think John’s argument is more persuasive because from an accountant’s

perspective, John doesn’t believe in anticipating the future that is totally different

from Karl’s views. As a manager, Karl evaluated too many bad debts from 2002 to

2004; as a result Karl decided to increase bad debt adjustment to 3% that John

rejected to implement since John thought the actual returns were 0.5% of sales

during the last 15 months. I think the revenue will be more accurate by John’s

argument. In the other hand, Karl’s opinion is more like a cheat behavior.

Case 7
 Don’t Leave Your

Hand In The Cookie

Jar

A 654

Guang Zeng