Question

The net accounts receivable on the bboks of GIY Corp as of 1 January 20X3 are as follow.

Accounts receivable $281,000

Less: Allowance for sales discounts $6,000

Allowance for doubtful accounts $20,650

Total $254,350

During the year, the sales discount allowance is left unchanged with discounts recorded directly in the sales discounts account. Allowance are adjusted at year-end. Summarized transaction during 20X3 are as follows.

a. Sales revenue was $620,000, of which 70% was on credit

b. Customers paid off $492,500 of the outstanding accounts receivable. Of this reduction to the accounts receivable, $300,000 was paid in time to earn a 2 % discount.

c. Accounts of $7,650 were written off a year-end.

d. There were recoveries of previously written-off accounts in the amount of $1,400

e. At year-end, analysis of accounts receivable indicates that an allowance of $3,950 is needed for sales discounts.

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

1. Prepare journal entries for the above transaction.

2. Show how the net accounts receivable appear on the statement of financial position on 31 December 20X3.

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

Answer 1

1. Journal entries
a) Accounts Receivable Dr.	434,000
Cash A/C Dr.	186,000
To Revenue A/c		620,000
(Being sales revenue recorded.)
b) Cash A/c Dr.	486,500
Discount A/c Dr.	6,000
To Accounts Receivable		486,500
(Being cash received from customer and discount provided.)
c) Bad debt expense Dr.	7,650
To Accounts Receivable		7,650
(Being bad debts written off.)
d) Accounts Receivable Dr.	1,400
To bad debt expense		1,400
(Being bad debts written off, now recovered.)
Cash A/c Dr.	1,400
To Accounts Receivable A/c		1,400
(Being bad debt recovered.)
e) Allowance for sales discounts A/c Dr.	3,950
To Accounts Receivable A/c		3,950
(Being allowance created for sales discount.)
f) Allowance for bad debts A/c Dr.	4,340
To Accounts Receivable		4,340
(Being allowance created for bad debts.)
2. Accounts Receivables
Opening Balance as at 1 January 20X3	281,000
Less: Allowance for sales discounts	(6,000)
Less: Allowance for doubtful accounts	(20,650)
Add: New additions	434,000
Less: Cash received	(486,500)
Less: Discount provided	(6,000)
Less: Bad debt expense	(7,650)
Add: Bad debts recovered	1,400
Less: Cash received for recovery	(1,400)
Less: Allowance for sales discounts	(3,950)
Less: Allowance for bad debts	(4,340)
Closing Balance as at 31 December 20X3	179,910
3. The level of the allowance for a doubtful account usually depends on the credit sales of the company or change in the collections of its receivables.