Question

The following transactions occurred over the months of September to December at Nicole’s Getaway Spa (NGS).

	September			Sold spa merchandise to Ashley Welch Beauty for $1,400 on account; the cost of these goods to NGS was $740.
	October			Sold merchandise to Kelly Fast Nail Gallery for $290 on account; the cost of these goods to NGS was $120.
	November			Sold merchandise to Raea Gooding Wellness for $140 on account; the cost of these goods to NGS was $110.
	December			Received $960 from Ashley Welch Beauty for payment on its account.

1. Estimate the Allowance for Doubtful Accounts required at December 31, assuming the only receivables outstanding at December 31 arise from the transactions listed above. NGS uses the aging of accounts receivable method with the following uncollectible rates: one month, 2%; two months, 5%; three months, 20%; more than three months, 35%.
2. The Allowance for Doubtful Accounts balance was $39 (credit) before the end-of-period adjusting entry is made. Prepare the journal entry to account for the Bad Debt Expense.
3. Assume the end of the previous year showed net accounts receivable of $720, and net sales for the current year are $8,200. Calculate the accounts receivable turnover ratio.
4. Audrey’s Mineral Spa has an accounts receivable turnover ratio of 8.0 times. How does NGS compare to this competitor?

Answer 1

SOLUTION

Req. 1

September	Accounts Receivable …………………….      Sales Revenue ………………..……… Cost of Goods Sold ………..……………..      Inventory ………………………..………	1,400 740	1,400 740
October	Accounts Receivable …………………….      Sales Revenue ……………………….. Cost of Goods Sold ……..………………..      Inventory ………………………………..	290 120	290 120
November	Accounts Receivable …………………….      Sales Revenue ……………….………. Cost of Goods Sold ………………………..      Inventory ………………………………..	140 110	140 110
December	Cash ……………………………………….      Accounts Receivable ………………….	960	960

Req. 2

Estimate the allowance for doubtful accounts:

($440 (1400-960) X 35%) + ($290 X 20%) + ($140 X 5%)

=154+58+7

= $219

Req. 3

Allowance for Doubtful Accounts (xA)
	39 Unadj. Bal. 180 AJE Bad Debt Expense
	219 Desired Bal.

Bad Debt Expense ……………………………..       Allowance for Doubtful Accounts …………

219

219

Req. 4

Accounts Receivable = ($1,400 – $960) + $290 + $140 = 870

Accounts Receivable	$870
Allowance for Doubtful Accounts	(219)
Net Accounts Receivable	$651

Accounts Receivable Turnover Ratio	=	Net Sales	=	$8,200	= $8,200/685.5 =11.96 times
Average Accounts Receivable	($651 + $720) 2

Req. 5

Nicole’s accounts receivable turnover ratio of 11.96 times is greater frequent than Audrey’s Mineral Spa’s ratio of 8.0 times. This indicates that Nicole’s Getaway Spa is faster in collecting receivables from customers than its competitor.