Question

Liang Company began operations in Year 1. During its first two years, the company completed a number of transactions involving sales on credit, accounts receivable collections, and bad debts. These transactions are summarized as follows. Year 1 a. Sold $1,349,100 of merchandise (that had cost $977,100) on credit, terms n/30. b. Wrote off $18,100 of uncollectible accounts receivable. c. Received $669,200 cash in payment of accounts receivable. d. In adjusting the accounts on December 31, the company estimated that 2.60% of accounts receivable would be uncollectible. Year 2 e. Sold $1,514,600 of merchandise (that had cost $1,299,000) on credit, terms n/30. f. Wrote off $26,700 of uncollectible accounts receivable. g. Received $1,110,700 cash in payment of accounts receivable. h. In adjusting the accounts on December 31, the company estimated that 2.60% of accounts receivable would be uncollectible. Required: Prepare journal entries to record Liang's Year 1 and Year 2 summarized transactions and its year-end adjustments to record bad debts expense. (The company uses the perpetual inventory system and it applies the allowance method for its accounts receivable.) (Round your intermediate calculations to the nearest dollar.)

Answer 1

Transaction	General Journal	Debit	Credit
a(1)	Accounts receivable	$1,349,100
	Sales		$1,349,100
a(2)	Cost of goods sold	$977,100
	Merchandise inventory		$977,100
b	Allowance for doubtful accounts	$18,100
	Accounts Receivable		$18,100
c	Cash	$669,200
	Accounts Receivable		$669,200
d	Bad Debt Expense                      [Refer working note 1]	$35,307
	Allowance for doubtful accounts		$35,307
e(1)	Accounts receivable	$1,514,600
	Sales		$1,514,600
e(2)	Cost of goods sold	$1,299,000
	Merchandise inventory		$1,299,000
f	Allowance for doubtful accounts	$26,700
	Accounts Receivable		$26,700
g	Cash	$1,110,700
	Accounts Receivable		$1,110,700
h	Bad Debt Expense                      [Refer working note 2]	$36,507
	Allowance for doubtful accounts		$36,507

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Working note 1 - Computation of bad debt expense for the year 1
Accounts receivables beginning balance	$0
Add: Credit sales	$1,349,100
Less: Collections	($669,200)
Less: Write-off's	($18,100)
Accounts receivables ending balance                                                             (a)	$661,800
Percentage uncollectible                                                                                 (b)	2.60%
Required balance in Allowance for doubtful accounts                                    (c = a x b)	$17,207
Unadjusted balance in Allowance for doubtful accounts (debit balance)        (d)	$18,100
Bad debt expense = Adjustment amount                                                           (c + d)	$35,307
Working note 2 - Computation of bad debt expense for the year 2
Accounts receivables beginning balance [Ending balance of Year 1]       [Refer working note 1]	$661,800
Add: Credit sales	$1,514,600
Less: Collections	($1,110,700)
Less: Write-off's	($26,700)
Accounts receivables ending balance                                                                                                          (a)	$1,039,000
Percentage uncollectible                                                                                                                              (b)	2.60%
Required balance in Allowance for doubtful accounts                                                                                 (c = a x b)	$27,014
Unadjusted balance in Allowance for doubtful accounts (debit balance)      [Refer working note 3]           (d)	$9,493
Bad debt expense = Adjustment amount                                                                                                         (c + d)	$36,507

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Working note 3 - Computation of Unadjusted balance in Allowance for doubtful accounts at the end of year 2
Beginning balance in the Allowance for doubtful accounts (credit balance)       [Refer working note 1]	$17,207
Less: Write-off made during year 2	($26,700)
Unadjusted balance in Allowance for doubtful accounts (debit balance)	$9,493