Question

Parrish Inc. Graded HW

At December 31, 2001, Parrish Inc. reported this information on its balance sheet:

Accounts receivable $2,000,000

Less: Allowance for doubtful accounts 120,000

During 2002, the company had the following transactions:

1. Sales on account $5,200,000

2. Sales returns and allowances 80,000

3. Collections of accounts receivables 4,600,000

4. Write-offs of accounts receivable deemed uncollectible 130,000

5. Recovery of bad debts previously written off 50,000 Required:

a. Prepare the journal entries to record each of these five transactions.

b. Prepare the journal entry to record the bad debt expense assuming that the company assumes its bad debts at 2% of net sales.

c. Enter the January 1, 2002, balances in Accounts Receivable and Allowance for doubtful accounts, post the entries to the two accounts (T accounts) and determine the balances.

d. Show the impact of these transactions on the 2002 income statement and balance sheet.

e. Compute the receivables turnover ratio and the average collection period for the company for 2002. The average collection period is 75 days in the industry. If you were a banker would you extend a loan to the company, why or why not.

Answer 1

a.

No	Account Titles and Explanation	Debit	Credit
1	Accounts receivable	5,200,000
	Sales revenue		5,200,000
2	Sales returns and allowances	80,000
	Accounts receivable		80,000
3	Cash	4,600,000
	Accounts receivable		4,600,000
4	Allowance for doubtful accounts	130,000
	Accounts receivable		130,000
5	Accounts receivable	50,000
	Allowance for doubtful accounts		50,000
	Cash	50,000
	Accounts receivable		50,000

b.

Account Titles and Explanation	Debit	Credit
Bad debt expense	102400
Allowance for doubtful accounts		102400
[5,200,000-80,000] *2%

c.

Accounts Receivable
Beg Bal	2,000,000	2	80000
1	5,200,000	3	4,600,000
5	50,000	4	130,000
		5	50,000
End bal	2,390,000

Allowance for doubtful accounts
4	130,000	Beg Bal	120,000
		5	50,000
		End Bal	40,000

d.

Income Statement
Sales revenue	5,200,000
Expenses
Bad debt expenses	130,000

Balance Sheet
Current Assets
Accounts receivable	2,390,000
Less: Allowance for doubtful accounts	40,000

e. Receivables turn over ratio= Net credit sales / Avg receivables = ( 5,200,000- 80,000) / [ (2,390,000+ 2,000,000)/2] = 2.33 times

average collection period = 365 / Receivables turn over ratio = 365/ 2.33 = 156

No, I would not extend the loan if I were a banker since the average collection period is way higher than the industry standards.