Prepare journal entries related to bad debt expense, and compute ratios . (LO 2,
ID: 2709961 • Letter: P
Question
Prepare journal entries related to bad debt expense, and compute ratios.
(LO 2, 3, 8), AP
At December 31, 2013, Dustin Company reported this information on its balance sheet.
During 2014, the company had the following transactions related to receivables.
Instructions
Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable. (Omit cost of goods sold entries.)
Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T-accounts), and determine the balances.
Prepare the journal entry to record bad debt expense for 2014, assuming that aging the accounts receivable indicates that expected bad debts are $140,000.
Compute the accounts receivable turnover and average collection period.
Accounts receivable $960,000 Less: Allowance for doubtful accounts 78,000Explanation / Answer
1. Journal entries to record five transactions.
2.
Account receivables
Particulars
Amount
Particulars
Amount
Balance
$ 960,000.00
Sales returns and allowances
$ 150,000.00
Sales
$ 3,600,000.00
Collections
$ 3,100,000.00
Reversal of uncollectible
$ 28,000.00
Written off as uncollectible
$ 92,000.00
Recovery of bad debts
$ 28,000.00
Balance
$ 1,218,000.00
Allowance for doubtful accounts
Particulars
Amount
Particulars
Amount
Balance
$ 78,000.00
Written off as uncollectible
$ 92,000.00
Reversal of uncollectible
$ 28,000.00
Balance
$ 14,000.00
3.
4. Account receivable turnover = Net sales / Average account receivable
Net sales = Sales - Sales return and allowances = $3,600,000 - $150,000 = $3,450,000
Average Account receivables =[ ($960,000 - $78,000) + ($1,218,000 - $140,000) ] / 2
= ($882,000 + $1,078,000) / 2 = $980,000
Account receivable turnover = $3,450,000 / $980,000 = 3.52 times
Average collection period = 365 days / Account receivable turnver = 365/ 3.52 = 103 days
Sl.No. Account name Debit Credit 1. Account receivable $3,600,00 Sales revenue $3,600,000 2. Sales revenue $150,000 Account receivable $150,000 3. Cash $3,100,000 Account receivable $3,100,000 4. Allowance for doubtful accounts $92,000 Account recceivable $92,000 5. Account receivable $28,000 Allowance for doubtful accounts $28,000 Cash $28,000 Account receivable $28,000