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

Sold $1,351,100 of merchandise (that had cost $981,600) on credit, terms n/30.

Wrote off $18,700 of uncollectible accounts receivable.

Received $667,400 cash in payment of accounts receivable.

In adjusting the accounts on December 31, the company estimated that 2.40% of accounts receivable will be uncollectible.

2017

Sold $1,532,300 of merchandise (that had cost $1,337,600) on credit, terms n/30.

Wrote off $27,400 of uncollectible accounts receivable.

Received $1,117,400 cash in payment of accounts receivable.

In adjusting the accounts on December 31, the company estimated that 2.40% 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
a.	Accounts receivable	1351100
	Sales revenue		1351100
	(To record merchandise sold on account)
	Cost of goods sold	981600
	Merchandise inventory		981600
	(To record cost of merchandise sold)
b.	Allowance for doubtful accounts	18700
	Accounts receivable		18700
	(To record uncollectible accounts written off)
c.	Cash	667400
	Accounts receivable		667400
	(To record cash collected against receivables)
d.	Bad debt expense	34660
	Allowance for doubtful accounts		34660
	(To record bad debt expense)
2017
e.	Accounts receivable	1532300
	Sales revenue		1532300
	(To record merchandise sold on account)
	Cost of goods sold	1337600
	Merchandise inventory		1337600
	(To record cost of merchandise sold)
f.	Allowance for doubtful accounts	27400
	Accounts receivable		27400
	(To record uncollectible accounts written off)
g.	Cash	1117400
	Accounts receivable		1117400
	(To record cash collected against receivables)
h.	Bad debt expense	36700
	Allowance for doubtful accounts		36700
	(To record bad debt expense)

2016: Allowance for doubtful accounts = 2.40% x ($1351100 - $18700 - $667400) = 2.40% x $665000 = $15960

Since there is already a debit of $18700 in Allowance for doubtful accounts, the same will have to be credited by $34660 ($18700 + $15960) so as to have an ending credit balance of $15960. The corresponding debit is to the bad debt expense account.

2017: Allowance for doubtful accounts = 2.40% x ($665000 + $1532300 - $27400 - $1117400) = 2.40% x $1052500 = $25260

Since there is already a debit balance of $15960 - $27400 = $11440 in Allowance for doubtful accounts before adjustment, the same will have to be credited by $11440 + $25260 = $36700 so as to have an ending credit balance of $25260. The corresponding debit is to the bad debt expense account.