Question

Problem 7-4A Accounts receivable transactions and bad debts adjustments LO C1, P2, P3 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 $1,350,100 of merchandise (that had cost $982,000) on credit, terms n/30. b. Wrote off $20,800 of uncollectible accounts receivable. c. Received $668,600 cash in payment of accounts receivable. d. In adjusting the accounts on December 31, the company estimated that 2.30% of accounts receivable would be uncollectible. Year 2 e. Sold $1,559,200 of merchandise (that had cost $1,349,500) on credit, terms n/30. f. Wrote off $25,300 of uncollectible accounts receivable. g. Received $1,396,300 cash in payment of accounts receivable. h. In adjusting the accounts on December 31, the company estimated that 2.30% 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

Year 1:

a(1):

To record entry for sales of merchandise on credit:

Credit Transaction a(1) General Journal Accounts Receivable To Sales (To record sales of merchandise on credit) Debit $1,350.100 2 3 $1,350.100

a(2):

To record entry for cost of goods sold:

D Credit Transaction a(2) Debit $982.000 7 General Journal Cost of Goods Sold To Inventory (To record cost of goods sold) $982.000 9

b:

To record entry for write off uncollectible accounts receivable:

B C Debit $20.800 D Credit Transaction b. General Journal Allowance for Doubtful Debt To Accounts Receivable (To record write off uncollectible accounts receivable) $20.800

c:

To record entry for cash payment of accounts receivable:

Transaction Credit Debit $668.600 General Journal Cash To Accounts Receivable (To record cash payment of accounts receivable) S668.600

d:

To record entry for uncollectible receivables:

D 21 Transaction Credit Debit $35.996 General Journal Bad debts To Allowance for Doubtful Debt (To record uncollectible receivables) $35.996 24

Working Note:

Computation of bad debts expense for year 1 is:

Bad debts expense for year 1 = [(Accounts receivable for year 1 - Write off uncollectible accounts receivable - Cash received of accounts receivable) * Percentage of uncollectible accounts] + Write off uncollectible accounts receivable

= [($1,350,100 - $20,800 - $668,600) * 2.30%] + $20,800

= [$660,700 * 2.30%] + $20,800

= $15,196 + $20,800

= $35,996

Hence, the bad debts expense for year 1 is $35,996.

Year 2:

e(1):

To record entry for sales of merchandise on credit:

Debit Credit Transaction e(1) General Journal Accounts Receivable To Sales (To record sales of merchandise on credit) $1,559,200 $1.559.200

e(2):

To record entry for cost of goods sold:

31 Credit Transaction e(2) Debit $1,349,500 32 General Journal Cost of Goods Sold To Inventory (To record cost of goods sold) $1,349,500

f.

To record entry for write off uncollectible accounts receivable:

Transaction Credit Debit $25,300 General Journal Allowance for Doubtful Debt To Accounts Receivable (To record write off uncollectible accounts receivable) $25,300

g.

To record entry for cash payment of accounts receivable:

D Transaction Credit Debit $1,396,300 General Journal Cash To Accounts Receivable (To record cash payment of accounts receivable) $1,396,300

h.

To record entry for uncollectible receivables:

Transaction Credit / Debit $28.465 General Journal Bad debts To Allowance for Doubtful Debt (To record uncollectible receivables) $28,465

Working Note:

Computation of bad debts expense for year 2 is:

Bad debts expense for year 2 = [(Accounts receivable for year 2 - Write off uncollectible accounts receivable - Cash received of accounts receivable) * Percentage of uncollectible accounts] + Write off uncollectible accounts receivable

= [($1,559,200 - $25,300 - $1,396,300) * 2.30%] + $25,300

= [$137,600 * 2.30%] + $25,300

= $3,164.8 + $25,300

= $28,465

Hence, the bad debts expense for year 2 is $28,645.