Reference no: EM133272829

John Corporation started its business on January 1, 2015. After considering collection experience of other entities in the industry, John established an allowance for doubtful accounts estimated at 5% of credit sales. Outstanding accounts receivable recorded on December 31, 2015 balanced P1,380,000, while the allowance for doubleful accounts had a credit balance of P150,000 after recording estimated doubtful accounts expense for December and after writing off P30,000 of uncollectible accounts.

Further Analysis of the entity;s accounts showed that merchandise purchased amount to P5,400,000 and ending merchandise inventory was P900,000. Goods were sold at 40% above cost. The total sales comprised 80% sales on account and 20% cash sales. Total collections from customers, excluding cash sales, amounted to P3,600,000.

1. What is the effect (overstated or understated) of the transactions on the accounts receivable?

2. What is the effect (Overstated or understated) of the transactions on the allowance for doubtful accounts?