Question

Clayco Company completes the following transactions during the year.

July 14

Writes off a $750 account receivable arising from a sale to Briggs Company that dates to 10 months ago. (Clayco Company uses the allowance method.)

July 30

Clayco Company receives a $1,000, 90-day, 10% note in exchange for merchandise sold to Sumrell Company (the merchandise cost $600)

Aug 15

Receives $2,000 cash plus a $10,000 note from JT Co. in exchange for merchandise that sells for $12,000 (its cost is $8,000). The note is dated August 15, bears 12% interest, and matures in 120 days

Nov 1

Completes a $200 credit card sale with a 4% fee (the cost of sales is $150). The cash is transferred immediately from the credit card company

Nov 3

Sumrell Company refuses to pay the note that was due to Clayco Company on October 28. Prepare the journal entry to charge the dishonored note plus accrued interest to Sumrell Company’s accounts receivable.

Nov 5

Completes a $500 credit card sale with a 5% fee (the cost of sales is $300). The cash is transferred immediately from the credit card company.

Nov 15

Receives the full amount of $750 from Briggs Company that was previously written off on July 14. Record the bad debts recovery.

Dec 13

Receives payment of principal plus interest from JT for the August 15 note.

Required
1. Prepare Clayco Company’s journal entries to record these transactions.
2. Prepare a year-end adjusting journal entry as of December 31 for each separate situation.

Bad debts are estimated to be $20,400 by aging accounts receivable. The unadjusted balance of the Allowance for Doubtful Accounts is a $1,000 debit.
Alternatively, assume that bad debts are estimated using the percent of sales method. The Allowance for Doubtful Accounts had a $1,000 debit balance before adjustment, and the company estimates bad debts to be 1% of its credit sales of $2,000,000.

Answer 1

1. The journal entries for the transactions are as follows:... 2. The adjusting journal entries for bad debts are as follows:...

Step-by-step explanation:

1. Journal entries to record the transactions:

• July 14: Allowance for Doubtful Accounts (Bad Debts Expense) 750, Accounts Receivable - Briggs Company 750
• July 30: Notes Receivable 1,000, Sales 1,000, Cost of Goods Sold 600, Merchandise Inventory 600
• Aug 15: Accounts Receivable - JT Co. (Merchandise Inventory) 12,000, Sales 12,000, Cost of Goods Sold 8,000, Notes Receivable 10,000
• Nov 1: Cash 192, Sales 192, Credit Card Expense 8, Cost of Goods Sold 150
• Nov 3: Accounts Receivable - Sumrell Company (Notes Receivable) 1,000, Interest Receivable 40, Interest Revenue 40
• Nov 5: Cash 475, Sales 475, Credit Card Expense 25, Cost of Goods Sold 300
• Nov 15: Accounts Receivable - Briggs Company 750, Bad Debts Recovery 750
• Dec 13: Cash 11,880, Notes Receivable 10,000, Interest Revenue 1,880

2. Adjusting journal entry for bad debts using the aging method:

• Bad Debts Expense 20,400, Allowance for Doubtful Accounts 20,400

Alternatively, adjusting journal entry for bad debts using the percent of sales method:

• Bad Debts Expense 20,000, Allowance for Doubtful Accounts 20,000

Answer 2

The Clayco Company's financial transactions are recorded within the accounting period, showing the journal entries for each event and the subsequent year-end adjustments based on either the aging of receivables or the percent of sales method for bad debts estimation.

Step-by-step explanation:

Clayco Company Journal Entries

Here are the journal entries for the transactions provided:

1. July 14: Bad Debt Expense Dr $750
   Allowance for Doubtful Accounts Cr $750
2. July 30: Notes Receivable Dr $1,000
   Sales Revenue Cr $1,000
   Cost of Goods Sold Dr $600
   Merchandise Inventory Cr $600
3. Aug 15: Cash Dr $2,000
   Notes Receivable Dr $10,000
   Sales Revenue Cr $12,000
   Cost of Goods Sold Dr $8,000
   Merchandise Inventory Cr $8,000
4. Nov 1: Cash Dr $192
   Credit Card Expense Cr $8
   Sales Revenue Cr $200
   Cost of Goods Sold Dr $150
   Merchandise Inventory Cr $150
5. Nov 3: Accounts Receivable Dr $1,025 (principal $1,000 + interest $25)
   Notes Receivable Cr $1,000
   Interest Revenue Cr $25
6. Nov 5: Cash Dr $475
   Credit Card Expense Cr $25
   Sales Revenue Cr $500
   Cost of Goods Sold Dr $300
   Merchandise Inventory Cr $300
7. Nov 15: Accounts Receivable Dr $750
   Allowance for Doubtful Accounts Cr $750
   Cash Dr $750
   Accounts Receivable Cr $750
8. Dec 13: Cash Dr $10,400
   Notes Receivable Cr $10,000
   Interest Revenue Cr $400