Question

The net accounts receivable on the books of GJY Corp. as of 1 January 20X3 are as follows:

Accounts receivable .............................................................    $ 281,000

Less: Allowance for sales discounts ..................................             6,000

Allowance for doubtful accounts ......................................           20,650
                                                                                                        $254,350

During the year, the sales discount allowance is left unchanged, with discounts recorded directly in the sales discounts account. Allowances are adjusted at year end. Summarized transactions 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 at 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.

 

Required:

1. Prepare journal entries for the above transactions.

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 doubtful accounts? Explain.

Answer 1

Requirement 1

 

a. Accounts receivable ($620,000 x 70%).......................................   434,000

Cash...................................................................................................   186,000

       Sales............................................................................................                        620,000

 

b.  Cash ($300,000 - $6,000)...............................................................294,000

Sales discounts ($300,000 x .02).......................................................     6,000

       Accounts receivable....................................................................                      300,000

 

 Cash                                                                                                       192,500

       Accounts receivable....................................................................                      192,500

 

c. Allowance for doubtful accounts..................................................... 7,650

       Accounts receivable....................................................................                          7,650

 

d. Accounts receivable.......................................................................... 1,400

       Allowance for doubtful accounts...............................................                          1,400

 

Cash ..................................................................................................       1,400

       Accounts receivable....................................................................                          1,400

Note: is also acceptable to do one entry, debiting cash and crediting the

 allowance for doubtful accounts. 

 

e. Allowance for sales discounts.......................................................    2,050

       Sales discounts...........................................................................                          2,050

       ($6,000 – 3,950) 

 

f. Bad debts expense...........................................................................    4,340

       Allowance for doubtful accounts...............................................                         4,340

       ($434,000 x 1%)

 

Requirement 2

Accounts receivable  ($281,000 +$434,000 - $300,000 - $192,500 + $1,400 - $1,400 - $7,650)	$ 214,850
Less: Allowance for sales discounts	3,950
Allowance for doubtful accounts   ($20,650 -$7,650 +$1,400 + $4,340)	18,740
	$192,160

 

Requirement 3

At the beginning of the year, the allowance for doubtful accounts is approximately 7.5% of accounts receivable, net of the allowance for sales discounts. At year end, the allowance is approximately 8.8% of net accounts receivable.  The addition to the allowance was less than the net write-offs during the year. A higher allowance might be needed because of worsening economic conditions, but it must be evaluated against the quality of accounts receivable for reasonableness.