Question

Liang Company began operations on January 1, 2016. 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. 2016 a. Sold $1,349,800 of merchandise (that had cost $982,500) on credit, terms n/30. b. Wrote off $19,400 of uncollectible accounts receivable. c. Received $670.900 cash in payment of accounts receivable. d. In adjusting the accounts on December 31, the company estimated that 2.80% of accounts receivable will be uncollectible. 2017 e. Sold $1,509,600 of merchandise (that had cost $1,322,000) on credit, terms 1/30 f. Wrote off $29,800 of uncollectible accounts receivable. 9. Received $1,391,700 cash in payment of accounts receivable. h. In adjusting the accounts on December 31, the company estimated that 2.80% of accounts receivable will be uncollectible. Required: Prepare journal entries to record Liang's 2016 and 2017 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 amount.)

Answer 1

Transaction	Account Titles and Explanation	Debit	Credit
2016
1	Accounts receivable	1349800
	Sales revenue		1349800
	(To record merchandise sold on account)
2	Cost of goods sold	982500
	Inventory		982500
	(To record cost of merchandise sold)
3	Allowance for doubtful accounts	19400
	Accounts receivable		19400
	(To record uncollectible accounts written off)
4	Cash	670900
	Accounts receivable		670900
	(To record cash collected against receivables)
5	Bad debt expense	37866
	Allowance for doubtful accounts		37866
	(To record bad debt expense)
2017
1	Accounts receivable	1509600
	Sales revenue		1509600
	(To record merchandise sold on account)
2	Cost of goods sold	1322000
	Inventory		1322000
	(To record cost of merchandise sold)
3	Allowance for doubtful accounts	29800
	Accounts receivable		29800
	(To record uncollectible accounts written off)
4	Cash	1391700
	Accounts receivable		1391700
	(To record cash collected against receivables)
5	Bad debt expense	32267
	Allowance for doubtful accounts		32267
	(To record bad debt expense)

Working:

2016: Allowance for doubtful accounts = 2.80% x ($1349800 - $19400 - $670900) = 2.80% x $659500 = $18466

Since there is already a debit of $19400 in Allowance for doubtful accounts, the same will have to be credited by $37866 ($19400 + $18466) so as to have an ending credit balance of $18466. The corresponding debit is to the bad debt expense account.

2017: Allowance for doubtful accounts = 2.80% x ($659500 + $1509600 - $29800 - $1391700) = 2.80% x $747600 = $20933

Since there is already a debit balance of $18466 - $29800 = $11334 in Allowance for doubtful accounts before adjustment, the same will have to be credited by $11334 + $20933 = $32267 so as to have an ending credit balance of $20933. The corresponding debit is to the bad debt expense account.