Question

Notes for Journal Entries:

1. Kuechly uses periodic inventory system and LIFO
2. All credit sales discounts are recorded using the net method – customers receive a 3 percent discount if they pay within 30 days.
3. Purchase discounts are recorded using the net method
4. All depreciation is straight line.

Sold inventory with a list price of $22,000 to M Jagger on credit.

Accepted a sales return from M Jagger for half of the inventory purchased (i.e., list price of $11,000); And M Jagger paid for the remainder in cash.

sold inventory to H Gilmore for $100,000 on credit

H Gilmore paid half of the amount owed

H Gilmore went bankrupt so Kuechly wrote off the balance owed by H Gilmore as uncollectible (hint: Directly write-off this Account since no allowance has been made yet).

Sold Inventory to J Lennon for $30,000 on Credit

How would i do the adjusting entries for this given:

Kuechly uses the balance sheet method for estimating bad debts and estimates that 5 percent of outstanding A/R at year-end will be uncollectible.

Answer 1

The balance-sheet approach to bad debts expresses uncollectible accounts as a percentage of accounts receivable. The difference between the current balance of allowance for doubtful accounts and the amount calculated using the balance sheet approach is the amount of bad debt expense for the period. But in this case, there is no previous balance in allowance for doubtful accounts. For this total amount of estimated bad debt is going to be recorded in allowance for doubtful accounts as bad debt expenses.

For calculating the estimated amount of doubtful debt lets calculate the year-end accounts receivable balance.

Calculation of the year-end accounts receivable balance:

M Jagger paid all the amount due to him, H Gilmore paid half of the amount owed and then he went bankrupt so, the remaining balance was written off directly as bad debt. For this while calculating year end accounts receivable there is no need to consider the sales to M Jagger and H Gilmore.

Goods sold to J Lemon on credit = $30,000

Discount = $30,000 × 3% = $900

Net amount due to J Lemon = $30,000 - $900 = $29,100

As, J Lemon not yet paid any amount so $29,100 is the year-end balance of accounts receivable.

Note: Under net method, the sales are initially recorded with the net amount i.e., after deducting the amount of discount from the list price. The accounts receivable account is debited and the sales account is credited with the net amount.

Now,

Expected amount of bad debt = Year-end balance of accounts receivable × 5%

= $29,100 × 5%

= $1,455

Journal Entry
Bad debt expenses	$ 1,455
Allowance for bad debt		$ 1,455
To record allowance for bad debt.