Question

L06-4,6-5 APG-7 Recording Receivables Transactions Reporting Accounts Receivable, and interpreting Ratios (PG-7) Rodamex Inc. reported the following summer transactions during the year ended December 31, 2018. a. Sold merchandise for $5,000,000, including $500,000 cash and $4,500,000 on account, with terms net 30 b. Sales returns and allowances, 850,000, 10 percent related to cash sales, and 90 percent related to sales on account c. Received 84,200,000 from customers on credit sales. d. Wrote off $17,000 in uncollectible accounts receivable. c. Recovered $6,000 cash from a customer whose account was previously written off. Rodamex estimated that doubtful accounts receivable represented 2 percent of the accounts receivable balance at December 31, 2017, and 2.5 percent at December 31, 2018. The company had $700,000 in accounts receivable at December 31, 2017. Required: 1. Prepare journal entries to record the summary transactions 2. Show how accounts receivable would be presented on the company's comparative statement of financial position as at December 31, 2018 3. Prepare the adjusting journal entry to record bad debt expense for 2018. 4. Compute the receivables turnover ratio for 2018. What does the result suggest about the companys ability to manage accounts receivable during 2018? 5. Compute the gross profit for 2018 assuming that the companu's cost of sales averages 40 percom of its net sales. DS. Determinina Baby

Answer 1

Requirement 1:

Transaction	Account title and Explanation	Debit	Credit
a	Cash	$500,000
	Accounts receivable	$4,500,000
	Sales revenue		$5,000,000
	[To record sales revenue]
b	Sales returns and allowance	$50,000
	Cash [50,000 x 10%]		$5,000
	Accounts receivable [50,000 x 90%]		$45,000
c	Cash	$4,200,000
	Accounts receivable		$4,200,000
	[To record collections from customers]
d	Allowance for doubtful accounts	$17,000
	Accounts receivable		$17,000
	[To record written off of uncollectible]
e	Accounts receivable	$6,000
	Allowance for doubtful accounts		$6,000
	[To record reinstate of previously written off]
	Cash	$6,000
	Accounts receivable		$6,000
	[To record cash collections from customers]

Requirement 2:

Balance Sheet (partial)
As of Dec 31,2018
Current assets:
Accounts receivable	$938,000

Calculations:

T-Account:

Accounts receivable
Beg. Bal.	$700,000	b	$45,000
a	$4,500,000	c	$4,200,000
e	$6,000	d	$17,000
		e	$6,000
End. Bal.	$938,000

Requirement 3:

Date	Account title and Explanation	Debit	Credit
Dec 31,2018	Bad debt expense	$20,450
	Allowance for doubtful account		$20,450
	[To record bad debt expense]

Calculations:

T-Account:

Allowance for doubtful accounts
d	$17,000	Beg. Bal. [700,000 x 2%]	$14,000
		e	$6,000
		Bad debt expense (balance amount)	$20,450
		End. Bal. [938,000 x 2.5%]	$23,450

Requirement 4:

Accounts receivable turnover ratio:

i. Net credit sales = Total credit sales - Sales returns and allowance for Accounts receivable

=$4,500,000 - $45,000

=$4,455,000

ii. Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable)/2

=($700,000+$938,000)/2

=$819,000

iii. Accounts receivable ratio = Net credit sales ÷ Average accounts receivable

= $4,455,000/819,000

=5.44 times

Ability:

Average collection period is 67 days (365÷5.44 times). but, Rodamex Inc. given credit sales with terms net/30. So, it indicates slower collection process.

Requirement 5:

Total Sales	$5,000,000
(less): Sales returns and allowance	($45,000)
Net sales	$4,955,000
(less): Cost of goods sold [4,955,000 x 40%]	($1,982,000)
Gross profit	$2,973,000