Question

The net accounts receivable on the books of GJY corporation as of January 1,2013 are as follows:

Account receivable	$562,000
Less: Allowance for sales discounts	($12,000)
Allowance for doubtful accounts	($41,300)
Net account receivable	$508,700

During the year, the sales discount allowance is left unchanged with discounts recorded directly in the sales discounts account. Allowances are adjusted at year-end. Summarized transactions during 2013 are as follows::

a) Sales revenue was $1,240,000 of which 70% was on credit.

b) Customers paid off $985,000 of the outstanding account receivable. Of this reduction to the account receivable, $600,000 was paid in time to earn a 2% discount.  

c) Accounts of $15,300 were written off at year-end.

d) There were recoveries of previously written-off accounts in the amount of $2,800.

e) At year-end, analysis of account receivable indicates that an allowance of $7,900 is needed for sales discounts.

f) At year-end, the allowance for doubtful accounts is increased by 1% of gross credit sales.

Required:

1) Prepare journal entries for the above transactions.

2) Show how the net accounts receivable appear on the statement of financial position on December 31,2013.

3) Do you have any concerns about the level of the allowance for doubtful accounts? Explain.

Answer 1

1	Particulars	Debit	Credit
a	CASH	$   3,72,000
	ACCOUNTS RECEIVABLE	$   8,68,000
	SALES		$ 12,40,000
B	CASH	$   9,85,000
	Allowance for sales discounts	$      12,000
	ACCOUNTS RECEIVABLE		$   9,97,000
C	Allowance for doubtful accounts	$      15,300
	ACCOUNTS RECEIVABLE		$       15,300
D	CASH	$         2,800
	BAD DEBTS RECOVERED		$         2,800
E	SALES DISCOUNT	$         7,900
	Allowance for sales discounts		$         7,900
f	BAD DEBTS	$         8,680
	Allowance for doubtful accounts		$         8,680

2	Particulars	Amount
	Account receivable	$   5,62,000
	Add: credit sales	$   8,68,000
	Less: Cash received	$ -9,85,000
	Less: allowance for sales discount	$     -12,000
		$   4,33,000
	Less: Allowance for sales discounts	$       -7,900
	Less: Allowance for doubtful accounts	$     -34,680
	Net account receivable	$   3,90,420

3. the percentage of allowance for doubtful accounts id 9% of net account receivables which is very high. Generally , the percentage is 2.5 %. It shows that the company is having high risk of non recoveries from accounts receivable.

Show formula in excel for calculations:

1	Particulars	Debit	Credit
a	CASH	=1240000*0.3
	ACCOUNTS RECEIVABLE	=1240000*0.7
	SALES		=+C3+C4
B	CASH	985000
	Allowance for sales discounts	=600000*2%
	ACCOUNTS RECEIVABLE		=+C7+C8
C	Allowance for doubtful accounts	15300
	ACCOUNTS RECEIVABLE		=+C11
D	CASH	2800
	BAD DEBTS RECOVERED		=+C14
E	SALES DISCOUNT	7900
	Allowance for sales discounts		7900
f	BAD DEBTS	=1240000*0.7*0.01
	Allowance for doubtful accounts		=1240000*0.7*0.01
2	Particulars	Amount
	Account receivable	562000
	Add: credit sales	=1240000*0.7
	Less: Cash received	-985000
	Less: allowance for sales discount	=-600000*2%
		=SUM(C25:C28)
	Less: Allowance for sales discounts	-7900
	Less: Allowance for doubtful accounts	=-41300+15300-8680
	Net account receivable	=SUM(C29:C31)