Question

PART 1

The following information is available for a company as of January 1, 2019:

Accounts Receivable	$300,000
Allowance for Doubtful Accounts	(14,000)
Accounts Receivable (net)	286,000

The following events took place during 2019:

1. During the year, the company sold services for $500,000 cash and $3,000,000 on credit.
2. On December 31, a decision was made to estimate bad debts as 0.5% of credit sales.
3. Accounts Receivable of $1,000 from prior years was determined to be uncollectible and was written off as a bad debt.
4. The company collected $2,800,000 of cash from accounts receivable.

Required

1. Prepare journal entries for each of the four events above that took place during 2019.
2. Determine the Accounts Receivable (net) amount as of December 31, 2019. Show your work.
3. Determine the receivables turnover ratio for 2018 and 2019. Credit sales for 2018 amounted to $2,000,000 and Accounts Receivable (net) as of December 31, 2017 was $250,000. Based on the turnover ratio, which year did the firm better manage its Accounts Receivable?

Answer 1

A			Debit	Credit
	1	Cash	$ 5,00,000
		Accounts Receivable	$ 30,00,000
		To Service Revenue		$       35,00,000
		(Being Sale of services Accounted)
	2	Bad Debt Expense	$ 15,000
		To Allowance for Doubtful Accounts		$ 15,000
		(Being bad debt estimated at 0.5% of Credit Sales, ie. $3000000*0.5%)
	3	Allowance for Doubtful Accounts	$ 1,000
		To Accounts Receivable		$ 1,000
		(Being uncollectible debt of $1000 written off)
	4	Cash	$            28,00,000
		To Accounts Receivable		$       28,00,000
		(Being cash received from debtors)

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B		Accounts Receivable
		Opening as on January 1,2019	$              3,00,000
		Credit Sales during the year	$ 30,00,000
		Less: Bad Debt written off	$                  -1,000
		Less: Cash Collected	$          -28,00,000
		Less:Allowance for Doubtful Accounts	$                -28,000
		Accounts Receivable (Net)	$ 471,000
		Note:
		Allowance for Doubtful Accounts
		Opening	$ 14,000
		Less: Bad Debt written off	$                  -1,000
		Add: Bad debt estimated during the year	$ 15,000
		Closing	$ 28,000

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C.

Receivables turnover
Credit Sales/ ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)
	2019	2018
Receivables turnover	7.93	7.46
	3000000/((471000+286000)/2	2000000/((286000+250000)/2)
	2019	2018	2017
Credit Sales	$ 30,00,000	$20,00,000
Accounts Receivable (net)	$ 471,000	$          286,000	$     2,50,000

Company's accounts receivable turned over 7.93 times during the year 2019 and 7.46 times during the year 2018 , which means that the average account receivabe was collected in 46 days in 2019 and 48.9 days in 2018. Thus firm did better management in accounts receivable during the year 2019.

**

46 days = 365/7.93

48.92 days = 365/7.46

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