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 $1,345,434 of merchandise (that had cost$975,000) on credit, terms n/30.
b. Wrote off $18,300 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 1.5% of accounts receivable would be uncollectible.
Year 2
e. Sold $1,525,634 of merchandise on credit (that had cost$1,250,000), terms n/30.
f. Wrote off $27,800 of uncollectible accounts receivable.
g. Received$1,204,600 cash in payment of accounts receivable.
h. In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable would be uncollectible.
Required
Prepare journal entries to record Liang's summarized transactions and its year-end adjustments to record bad debts expense.

Answer 1

The business task involves creating accounting entries for sales on credit, bad debt write-offs, cash collections, and year-end adjustments for uncollectible accounts based on a set percentage estimation, which are fundamental accounting practices within the financial management of a company.

Step-by-step explanation:

The question involves preparing journal entries for the described transactions and year-end adjustments related to bad debt expense for Liang Company, which aligns with accounting principles. Below are the summarized journal entries for Year 1 and Year 2 transactions:

• Sales on Credit - Debit Accounts Receivable and Credit Sales Revenue.
• Write-off of Bad Debts - Debit Bad Debts Expense and Credit Accounts Receivable.
• Cash Receipts on Account - Debit Cash and Credit Accounts Receivable.
• Adjustment for Bad Debts Expense (Year-end) - Debit Bad Debt Expense and Credit Allowance for Doubtful Accounts based on the percentage applied to the ending accounts receivable.

All entries would be recorded by the date they occurred, with exact amounts as provided in the transactions. The end-of-year adjustment is based on an aging analysis or a percentage of sales method. This estimation aligns with the matching principle of accounting which states that expenses should be recognized in the same period as the revenues they helped to generate.