The following information is taken from the financial statements of Ramsay Health Care Inc.:

Required:
1. Reconstruct all journal entries relating to Gross accounts receivable and Allowance for doubtful accounts (that is, Allowance for uncollectibles) for the year ended December 31, Year 3. You may assume that all revenues are from credit sales.
2. Assume that the company computes its provision for doubtful accounts by multiplying sales revenues by some percentage (called the sales revenue approach). Recalculate the provision for doubtful accounts for Year 3; assume that Ramsay estimated the Year 3 bad debts at the same percentage of revenue as it did in Year 2. Based on the revised figure, show how to present Gross accounts receivable and Allowance for doubtful accounts as of the end of Year 3. Also calculate a revised operating income before taxes using the revised figure for the provision for doubtful accounts.
3. In answering this part, assume that the company is using the gross accounts receivable approach to estimate its provision for doubtful accounts (that is, assume that Allowance for doubtful accounts is fixed as a percentage of gross receivables). Recalculate the provision for doubtful accounts for Year 3 and the ending balance in Allowance for doubtful accounts at the end of Year 3; assume that Ramsay estimated the expected bad debts at the same percentage of receivables as it did in Year 2. Also, calculate the revised operating income before taxes using the revised figure for the provision for doubtful accounts.
4. Based on your answers to requirements 2 and 3, what inferences can be drawn about Ramsay€™s accounts receivables management and the adequacy of the Allowance for doubtfulaccounts?

Transcribed Image Text:

Excerpts from Balance Sheets as of End of Year 3 Year 2 Gross accounts receivable Allowance for doubtful accounts S26,944,000 (3,925,000 S23,019,000 $31,651,000 (4,955,000) $26,696,000 Net accounts receivable Excerpts from Income Statements for the Years Ended Year 3 Year 2 Year I $137,002,000 $136,354,000 8,148,000 (1,048,000) $136,946,000 Revenue Provision for doubtful accounts Operating income before taxes 5,846,000 6,900,000 8,628,000 9,321,000