Question

Part A:

Penguin Co. uses an aging schedule of accounts receivable in estimating its bad debt expense. The total estimate, which appears on the aging schedule, will be equal to

		the amount of bad debt expense on the company’s income statement.
		the debit balance required in the allowance account prior to the recognition of bad debt expense.
		the increase in bad debt expense as a result of the estimate.
		the credit balance required in the allowance account after the recognition of bad debt expense.

Part B

Use the following formula for this question:

Debt/equity ratio = Average total liabilities / Average total shareholders’ equity

Justin Company has total assets, liabilities, and shareholders' equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2017. At the end of 2017, total assets, liabilities, and shareholders' equity were reported at $32,000, $13,000, and $19,000, respectively. How much additional debt can Justin Company incur and still have its debt/equity ratio remain less than or equal to 1.00?

		$10,000
		$25,000
		$12,000
		$24,000

Part C:

The face amount of accounts receivable for Rio Inc. is $20,000. It was estimated that 5% of the accounts will not be collected, cash discounts of $500 will be exercised, and $200 of sales returns will be experienced. The net realizable value of accounts receivable is

		$19,500
		$19,300
		$20,000
		$18,300

Answer 1

Debt equity ratio = Average total liabilities / average share holders equity
Average liabilities = (17,000+13,000)/2 = 15,000
Average shareholders equity = (21,000+19,000)/2 = 20,000
Current debt equity ratio = 15,000/20,000 = 0.75
Average liabilities to make debt equity ratio 1 is 20,000
17,000 +closing liabilities = 40,000
Closing liabilities = 23,000
The additional debt that company can incur and debt equity ratio still less than 1 is 9,999. (23,000-13,000-1)