Star Corp. sold merchandise for $8,000 to MegaStore on May 15, 2015, with payment due in 30 days. Subsequent to this, MegaStore experienced cash flow problems and was unable to pay its debt. On August 10, 2015, Star stopped trying to collect the outstanding receivable from MegaStore and wrote off the account as uncollectible. On December 1, 2015, MegaStore sent Star a check for $2,000 and offered to sign a two-month, 12%, $6,000 promissory note to satisfy the remaining obligation. MegaStore paid the entire amount due Star, with interest, on January 31, 2016. Star ends its accounting year on December 31 each year and uses the allowance method to account for bad debts.
REQUIRED:
1. Identify the effects on the accounting equation for Star's transactions from May 15, 2015 to January 31, 2016.
2. Why would MegaStore bother to send Star a check for $2,000 on December 1 and agree to sign a note for the balance, given that such a long period of time had passed since the original purchase?

Question

Quizplus · Accepted Answer

The Answer of Star Corp. sold merchandise for $8,000 to MegaStore on May 15, 2015, with payment due in 30 days. Subsequent to this, MegaStore experienced cash flow problems and was unable to pay its debt. On August 10, 2015, Star stopped trying to collect the outstanding receivable from MegaStore and wrote off the account as uncollectible. On December 1, 2015, MegaStore sent Star a check for $2,000 and offered to sign a two-month, 12%, $6,000 promissory note to satisfy the remaining obligation. MegaStore paid the entire amount due Star, with interest, on January 31, 2016. Star ends its accounting year on December 31 each year and uses the allowance method to account for bad debts.
REQUIRED:
1. Identify the effects on the accounting equation for Star's transactions from May 15, 2015 to January 31, 2016.
2. Why would MegaStore bother to send Star a check for $2,000 on December 1 and agree to sign a note for the balance, given that such a long period of time had passed since the original purchase?

Star Corp Sold Merchandise for $8,000 to MegaStore on May 15