The accounting department of your company has just delivered

The accounting department of your company has just delivered a draft of the current year\'s financial statements to you. The summary is as follows: of the Year of the Year otal Assets otal Liabilities Total 550,000 210,000 340,000 201,000 40,000 7.700 21,000 t Income for the Year Shares Out 21,000 You discovered that they have not adjusted for estimated bad debt expenses of $8,700. For each of the following ratios, calculate: 1. The ratio that would have resulted had the error not been discovered i.e. the incorrect ratio). 2. The correct ratio. Correct 2 ROA 3 ROE 4 Debt Ratio 5 EPS 10

Solution

* Journal entry for recording estimated bad debt expense:

Journal entry -1

Debit Credit

Bad debt expense a/c $8,700   

To Accounts receivable a/c $8,700

(Being bad debt recognised)

Journal entry -2

  Profit or Loss a/c $8,700

To Bad debt expense $8,700

(Being bad debt expense transfered to P&L a/c)

Summary of financial statments at the end of the financial year:

Before adjustig bad debt expenses

	Before adjustig bad debt expenses	After adjusting bad debt expenses
Total assets	$641,000	$632,300 ($641,000 - $8,700)
Total Liabilities	$201,000	$210,000
Total equity	$340,000	$422,300
Net income	$77,700	$69,000 ($77,700 - $8,700)
Common shares outstanding	21,000	21,000