Question

At December 31, 2020, Obermeyer Imports reported the following information on
its balance sheet.
Accounts receivable $250,000
Less: Allowance for doubtful accounts 15,000
During 2021, the company had the following transactions related to receivables.
1. Sales on account $2,600,000
2. Sales returns and allowances 45,000
3. Collections of accounts receivable 2,250,000
4. Write-offs of accounts receivable deemed uncollectible 10,000
5. Recovery of bad debts previously written off as uncollectible 3,000
Instructions
Requirement 1: Assuming Obermeyer Imports uses debt aging method and
estimates that bad debts would be $22,000.
(a) Prepare the journal entries to record each of these five transactions. Assume that
no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2021, balances in Accounts Receivable and Allowance for
Doubtful Accounts. Post the entries to the two accounts (use T-accounts), and
determine the balances.
(c) Prepare the journal entry to record bad debt expense for 2021.
(d) Compute the accounts receivable turnover for the year 2021.
Requirement 2: Assuming Obermeyer Imports uses percentage of sales method. Past
experience indicates that estimated bad debt expense are usually 0.5% on sales.
(a) Prepare the journal entries to record each of these five transactions. Assume that
no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2021, balances in Accounts Receivable and Allowance for
Doubtful Accounts. Post the entries to the two accounts (use T-accounts) and
determine the balances.
(c) Prepare the journal entry to record bad debt expenses for 2021.
(d) Compute the accounts receivable turnover for the year 2021.

Answer 1

a) The journal entries to record the five transactions are as follows:

1. Debit Accounts Receivable $2,600,000

Credit Sales Revenue $2,600,000

2. Debit Sales Returns and Allowances $45,000

Credit Accounts Receivable $45,000

3. Debit Cash $2,250,000

Credit Accounts Receivable $2,250,000

4. Debit Allowance for Doubtful Accounts $10,000

Credit Accounts Receivable $10,000

5. Debit Accounts Receivable $3,000

Credit Allowance for Doubtful Accounts $3,000

Debit Cash $3,000

Credit Accounts Receivable $3,000

b) T-accounts:

Accounts Receivable

Account Title              Debit           Credit

Beginning balance $250,000

Sales Revenue   $2,600,000

Sales Returns and Allowances      $45,000

Cash                                          $2,250,000

Allowance for Doubtful Accounts $10,000

Ending balance                          $545,000

Totals                 $2,850,000  $2,850,000

Allowance for Doubtful Accounts

Account Title                 Debit           Credit

Beginning balance                         $15,000

Accounts Receivable $10,000

Accounts Receivable                     $3,000

Bad Debts Expense                       14,000

Ending balance         $22,000

c) The preparation of the journal entry to record the bad debt expense for 2021 is as follows:

Debit Bad Debts Expenses $14,000

Credit Allowance for Doubtful Accounts $14,000

d) The accounts receivable turnover for the year 2021:

Average accounts receivable = $397,500 ($250,000 + $545,000)/2

Net Sales = $2,550,000 ($2,600,000 - $45,000)

Accounts Receivable Turnover = Net Sales/Average Accounts Receivable

= 6.43x ($2,550,000/$397,500)

2. The preparation of the journal entry to record the bad debt expense for 2021, based on bad debt expense of 0.5% of sales, is as follows:

Debit Bad Debts Expenses $13,000

Credit Allowance for Doubtful Accounts $13,000

= $13,000 ($2,600,000 x 0.5%)

Data and Calculations:

December 31, 2020 Balances:

Accounts receivable = $250,000

Allowance for doubtful accounts = $15,000

2021 Transactions Analysis:

1. Accounts Receivable $2,600,000 Sales Revenue $2,600,000

2. Sales Returns and Allowances $45,000 Accounts Receivable $45,000

3. Cash $2,250,000 Accounts Receivable $2,250,000

4. Allowance for Doubtful Accounts $10,000 Accounts Receivable $10,000

5. Accounts Receivable $3,000 Allowance for Doubtful Accounts $3,000

Cash $3,000 Accounts Receivable $3,000

6. Bad Debts Expenses $14,000 Allowance for Doubtful Accounts $14,000

Bad Debts Expenses = 0.5%

= $13,000 ($2,600,000 x 0.5%)

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