Answer:
<u>For Fortuna Co. </u>
Account receivables turnover ratio = net credit sales during the year / average accounts receivable
-
2015 = $10,265,536 / [($1,052,112 + $1,141,906)/2] = 9.358
- 2016 = $10,597,336 / [($900,516 + $1,052,112)/2] = 10.854
Average collection period = 365 days / accounts receivables turnover ratio
- 2015 = 365 days / 9.358 = 39 days
- 2016 = 365 days / 10.854 = 33.63 days
Since the accounts receivable turnover ratio is higher for 2016, the average collection period will be shorter. This means that the company is collecting its outstanding credit faster in 2016 than 2015.
<u>For Saturn, Inc. </u>
Prepare general journal entries for the following transactions that occurred during the year:
(1) Wrote off N. Purcell’s account, $6,800.
- Dr Allowance for doubtful accounts 6,800
- Cr Accounts receivables 6,800
(2) Wrote off J. Stein’s account, $2,400.
- Dr Allowance for doubtful accounts 2,400
- Cr Accounts receivables 2,400
(3) J. Stein, who is in bankruptcy, paid $800 in final settlement of the account written off in transaction
first you must reverse the write off
- Dr Accounts receivables 800
- Cr Bad debt expense 800
now you record the collection of the settlement amount
- Dr Cash 800
- Cr Accounts receivables 800
(4) On December 31, estimated the year’s bad debts expense at 1% of credit sales.
balance for allowance for doubtful accounts = $8,000 - $6,800 - $2,400 = -$1,200 or $1,200 debit balance
total credit sales $1,200,000 x 1% (estimated bad debt) = $12,000 credit balance for allowance for doubtful accounts
the journal entry to record bad debt expense:
- Dr Bad debt expense 13,200
- Cr Allowance for doubtful accounts 13,200
