While Front Row Entertainment has had considerable success in signing artists and promoting concerts, Cam and Anna still had a few ideas to grow their business that they wanted to implement. One idea that they both agreed on was to start an online fan ‘‘community’’ for each of their artists. By providing a more direct connection between the artists and their fans, each artist community would serve as an online fan club that should generate increased interest and attendance in the artists’ concerts. In addition to marketing and promoting the artist, Front Row Entertainment could sell advertising space on these fan communities to companies interested in reaching the particular demographic that the artist attracts. Because the summer concert season is one of the busiest and most lucrative times of the year, Cam and Anna felt it was extremely important to get the fan communities in place prior to the beginning of the summer. Therefore, they engaged in the following selected transactions for the months of May and June:
May 1 Paid Web Design Inc. $8,500 to develop the fan websites. The fan websites were operational on May 10. Front Row charged this expenditure to other expense.
May 10 Front Row Entertainment sold $550 worth of advertising to Little John’s Restaurant with terms 2/10, n/30. The advertising will randomly appear on the artists’ websites throughout the month of May.
May 15 Front Row Entertainment sold $475 worth of advertising to Sherwood Media with terms 2/10, n/30. The advertising related to an in-store DVD promotion that Sherwood was holding later in the month.
May 19 Front Row Entertainment received payment from Little John for the May 8 bill.
May 20 Sherwood Media informed Front Row that an error had been made on its advertisement.
Sherwood’s promotion was supposed to run from May 20 to May 25; however, the advertisement stated that the promotion would run from May 15 to May 25. Because the error was Front Row’s fault, Front Row agreed to reduce the amount owed by $150.
June 1 Front Row Entertainment sold $750 worth of advertising to Big House Entertainment Company with terms 2/10, n/30. The advertising will randomly appear on the artists’ websites throughout the month of June.
June 10 Sherwood paid Front Row the amount owed for the May 15 bill less the allowance granted on May 20.
June 20 When Front Row learns that Big House Entertainment has filed for bankruptcy, it writes off the $750 receivable.
Over the next few months, the fan communities continue to grow in popularity, with more and more companies purchasing advertising space. By the end of 2011, Front Row reports the following balances:
Accounts receivable ................ $17,900
Allowance for doubtful accounts .......... 250 (debit)
Credit sales .................. 45,000
Required:
1. Prepare journal entries for the May and June transactions.
2. Prepare the adjusting entry required at December 31, 2011, with regard to bad debt under each of the following independent assumptions.
a. Assume that Front Row performed an aging of its accounts receivable. Front Row estimates that $895 of its accounts receivable will be uncollectible.
b. Assume that Front Row uses the percentage of credit sales method and estimates that 2% of credit sales will be uncollectible.