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
1. Sold $1,348,100 of merchandise (that had cost $981,200) on credit, terms n/30.
2. Wrote off $20,700 of uncollectible accounts receivable.
3. Received $667,100 cash in payment of accounts receivable.
4. In adjusting the accounts on December 31, the company estimated that 1.60% of accounts receivable would be uncollectible.
Year 2
1. Sold $1,557,000 of merchandise (that had cost $1,347,300) on credit, terms n/30.
2. Wrote off $28,600 of uncollectible accounts receivable.
3. Received $1,241,900 cash in payment of accounts receivable.
4. In adjusting the accounts on December 31, the company estimated that 1.60% 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.

Answer 1

Answer and Explanation:

The journal entries are shown below;

For the year 1

1. Accounts receivable $1,348,100

To Sales $1,348,100

(Being the sale of merchandise is recorded)

Cost of good sold $981,200

To Merchandise inventory $981,200

(Being the cost of merchandise is recorded)

2. Allowance for doubtful accounts $20,700

To Accounts receivable $20,700

(Being the written off amount is recorded)

3. Cash $6,67,100

To Accounts receivable $6,67,100

(Being the cash received is recorded)

d. Bad debts expense $31,264.80

To Allowance for doubtful accounts $31,264.80

(Being the bad debt expense is recorded)

The computation is shown below for bad debts

Sales $1,348,100

Less: cash collection -$667,100

Less: written off amount -$20,700

Ending balance of account receivable $660,300

1.60% of account receivable $10,564.80

Add: debit balance $20,700

bad debt expense $31,264.80

For the year 2

1. Accounts receivable $1,557,000

To Sales $1,557,000

(Being the sale of merchandise is recorded)

Cost of good sold $1,347,300

To Merchandise inventory $1,347,300

(Being the cost of merchandise is recorded)

2. Allowance for doubtful accounts $28,600

To Accounts receivable $28,600

(Being the written off amount is recorded)

3. Cash $1,241,900

To Accounts receivable $1,241,900

(Being the cash received is recorded)

d. Bad debts expense $33,184

To Allowance for doubtful accounts $33,184

(Being the bad debt expense is recorded)

The computation of the bad debt expense is shown below;

beginning balance of account receivable $660,300

Add: Sales $1,557,000

Less: cash collection -$1,241,900

Less: written off amount -$28,600

Ending balance of account receivable $948,600

1.60% of account receivable $15,148.80

Add: debit balance ($28,600 - $10,564.80) $18,035.20

Year end adjustment $33,184