Question

Lenox Corp. sold merchandise for $5,900 to M. Baxter on May 15, 2017, with payment due in 36 days. Subsequent to this, Baxter experienced cash-flow problems and was unable to pay its debt. On August 10, 2017, Lenox stopped trying to collect the outstanding receivable from Baxter and wrote off the account as uncollectible. On December 1, 2017, Baxter sent Lenox a check for $1,100 and offered to sign a two-month, 9%, $4,800 promissory note to satisfy the remaining obligation. Baxter paid the entire amount due Lenox, with interest, on January 31, 2018. Lenox ends its accounting year on December 31 each year and uses the allowance method to account for bad debts.

Required:
1. Prepare all of the necessary journal entries on the books of Lenox Corp. from May 15, 2014 to January 31, 2015.
2 Why would Baxter bother to send Lenox a check for $1,000 on December 1 and agree to sign a note for the balance, given that such a long period of time had passed since the original purchase?

Answer 1

1) May 15, 2017, merchandise sold on account to Baxter

Dr Accounts receivable 5,900

Cr Sales revenue 5,900

Sometime prior to August 10, but after May 15, bad debt must be recorded

Dr Bad debt expense 5,900

Cr Allowance for doubtful accounts 5,900

August 10, 2017, write off of uncollectible account

Dr Allowance for doubtful accounts 5,900

Cr Accounts receivable 5,900

December 1, 2017, write off is reversed

Dr Accounts receivable 5,900

Cr Allowance for doubtful accounts 5,900

December 1, 2017, check received + notes receivable

Dr Cash 1,100

Dr Notes receivable 4,800

Cr Accounts receivable 5,900

December 31, 2017, accrued interest revenue

Dr Interest receivable 36

Cr Interest revenue 36

January 1, 2018, collection of notes receivable

Dr Cash 4,872

Cr Interest receivable 36

Cr Interest revenue 36

2) If a company owes money, the option of a lawsuit exists, even if Lenox does not fila a lawsuit, Baxter's credit history will be negatively affected. A bad credit history negatively affects both individuals and businesses.