Problem 9-1A (P9-1A) December 31, 2007, Leis Co. reported the following informat
ID: 2442526 • Letter: P
Question
Problem 9-1A (P9-1A) December 31, 2007, Leis Co. reported the following information on its balance sheet.
Accounts receivable $960,000
Less: Allowance for doubtful accounts 80,000
During 2008, the company had the following transactions related to receivables.
1. Sales on account $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 24,00 Compute the accounts receivable turnover ratio for 2008
Instruction
1. Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
2. Enter the January 1, 2008, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances.
3. Compute the accounts receivable turnover ratio for 2008, assuming that aging of accounts receivables indicates that expected bad debts are $115,000.
4. Compute the accounts receivable turnover ratio for 2008.
Explanation / Answer
(1)
Accounts Receivable – $3,200,000
Sales -- $$3,200,000
Sales Returns and Allowances -- $50,000
Accounts Receivable -- $50,000
Cash -- $2,810,000
Account Receivable -- $2,810,000
Allowance for Doubtful accounts -- $90,000
Accounts receivable -- $90,000
Accounts Receivable -- $24,000
Allowance for doubtful account -- $24,000
Cash -- $24,000
Accounts receivable -- $24,000
2. Sales returns and allowances 50,000
Dr Sales returns and allowances 50,000
Cr AR 50,000
(3)
Prepare the journal entry to record bad debts expense for 2008, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
You need your allowance for doubtful debts account to have a balance of $115,000, but you already have a balance of $14,000 in that account, so you only need another $101,000.
Dr Bad debts expense $101,000
Cr Allowance for doubtful debts $101,000
(4)
Compute the accounts receivable turnover ratio for 2008.
The receivable turnover ratio is calculated by dividing net credit sales by the average net receivables.
Net receivables for 2007: $960,000 - $80,000 = $880,000
Net receivables for 2008: $1,210,000 - $115,000 = $1,095,000
Average net receivables = ($880,000 + $1,095,000)/2 = $987,500
AR turnover ratio for 2008 = $3,150,000/987,500 = 3.19 times
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