Question

The following series of transactions occurred during Year 1 and Year 2, when Linwood Co. sold merchandise to John Moore. Linwood's annual accounting period ends on December 31. 10/01/Yr 1 Sold $12,000 of merchandise to John Moore, terms 2/10, n/30. 11/15/Yr 1 Moore reports that he cannot pay the account until early next year. He agrees to exchange the account for a 120-day, 12% note receivable. 12/31/Yr 1 Prepared the adjusting journal entry to record accrued interest on the note. 03/15/Yr 2 Linwood receives a check from Moore for the maturity value (with interest) of the note. 03/22/Yr 2 Linwood receives notification that Moore's check is being returned for nonsufficient funds (NSF). 12/31/Yr 2 Linwood writes off Moore's account as uncollectible. Prepare Linwood Co.'s journal entries to record the above transactions. The company uses the allowance method to account for its bad debt expense.

Answer 1

Journal entries to record the given transactions for year 1 and year 2 is shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
10/01/Yr 1	Accounts Receivable	12,000
	Sales revenue		12,000
	(To record the credit sales)
11/15/Yr 1	Notes Receivable	12,000
	Accounts Receivable		12,000
	(To record the receipt of note from John)
12/31/Yr 1	Interest Receivable ($12,000*12%*46 days/365 days)	181
	Interest Revenue on Note		181
	(To record the accrued interest revenue)
03/15/Yr 2	Cash [12,000+(12,000*12%*120/365)]	12,473
	Interest Receivable		181
	Notes Receivable		12,000
	Interest Revenue on Note (473-181)		292
	(To record the maturity of note)
03/22/Yr 2	Accounts Receivable	12,473
	Cash		12,473
	(To record the check dishonored)
12/31/Yr 2	Allowance for Uncollectible Accounts	12,473
	Accounts Receivable		12,473
	(To write off the account)

Working Notes:-

1) On dishonor of check on 03/22/Yr 2, the amount for sales along with interest ($473) is debited to accounts receivable.

2) Under allowance method, allowance account is used for writing off account.