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Accounts Receivable and Bad Debts Expense. Can someone help?

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Accounts Receivable and Bad Debts Expense. Can someone help?

Postby tarrant37 » Wed Aug 10, 2011 6:47 am

We just started the chapter relating Accounts Receivable to Bad Debts Expense and I'm kind of lost, have this horrible mind block. The question is as follows:

At December 31, 2009, Leis Co. reported the following information on its balance sheet,
Accounts Receivable $960,000
Less: Allowance for doubtful accounts $80,000

During 2010, the company had the following transactions related to receivables.
1. Sales on accounts $3,200,000
2. Sales returns and allowances 50,000
3. Collections of accounts receivable 2,810,000
4. Write-offs of accounts receivable deemed uncollectible 90,000
5. Recovery of bad debts previously written off as uncollectible 24,000

Instructions:
(a) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2010, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances.
(c) Prepare the journal entry to record bad debts expense for 2010, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
(d) Compute the accounts receivable turnover ratio for 2010.

I've already done (a) and (b) so I just need help on (c) and (d). Please help. Thanks.
tarrant37
 
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Accounts Receivable and Bad Debts Expense. Can someone help?

Postby amos » Wed Aug 10, 2011 6:48 am

c) Prepare the journal entry to record bad debts expense for 2010, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
Just remember that the CREDIT balance in Allowance for Doubtful Accounts AFTER the adjustment must equal the expected Bad Debt Expense (115,000). Before the adjustment, the account had a credit balance of 80,000 - 90,000 + 24,000 = 14,000
Dr Bad Debt Expense 101,000
Cr Allowance for Doubtful Accounts 101,000

(d) Compute the accounts receivable turnover ratio for 2010.
Net Credit Sales / Average Accounts Receivable (Net)

Net Credit Sales = 3,200,000 - 50,000 = 3,150,000
Average Accounts Receivable (Net) [(960,000 - 80,000) + (1,234,000 - 115,000)] / 2 = 999,500
3,150,000 / 999,500 = 3.15 Times (accounts receivable turnover ratio)
amos
 
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