Rodamex Inc. reported the following summary transactions during the year ended December 31, 2015:
a. Sold merchandise for $ 5,000,000, including $ 500,000 cash and $ 4,500,000 on account, with terms net/ 30.
b. Sales returns and allowances, $ 50,000; 10 percent related to cash sales, and 90 percent related to sales on account.
c. Received $ 4,200,000 from customers on credit sales.
d. Wrote off $ 17,000 in uncollectible trade receivables.
e. Recovered $ 6,000 cash from a customer whose account was previously written of
f. Rodamex estimated that doubtful trade receivables represented 2 percent of the trade receivables balance at December 31, 2014, and 2.5 percent at December 31, 2015. The company had $ 700,000 in trade receivables at December 31, 2014.
Required:
1. Prepare journal entries to record the summary transactions.
2. Show how trade receivables would be presented on the company’s comparative statement of financial position as at December 31, 2015.
3. Prepare the adjusting journal entry to record bad debt expense for 2015.
4. Compute the receivables turnover ratio for 2015. What does the result suggest about the company’s ability to manage trade receivables during 2015?
5. Compute the gross profit for 2015 assuming that the company’s cost of sales averages 40 per cent of its net sales.