Question

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn?A. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.B. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance.C. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance.D. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.

Answer 1

Answer:

A) Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

Explanation:

accounts receivable turnover from the previous year = total sales previous year / average gross receivables previous year = $1,000,000 / $100,000 = 10

accounts receivable turnover from the current year = total sales current year / average gross receivables current year = $2,000,000 / $300,000 = 6.67

ratios of uncollectible accounts receivable to gross accounts receivable for previous year = $30,000 / $100,000 = 0.3

ratios of uncollectible accounts receivable to gross accounts receivable for current year = $50,000 / $300,000 = 0.167

Option A shows the correct amounts for the accounts receivable turnover and ratios of uncollectible accounts receivable to gross accounts receivable. Since the ratio of uncollectible accounts receivable decreased so much during the current year, the allowance for accounts receivables for the current should be double checked to see if it wasn't understated.