Question

Sunderland Company commenced business operations on January 1, 2017. During its first two years of operations, the company completed transactions involving sales on credit, accounts receivable collections, and bad debts. On December 31, 2017, its Accounts Receivable account and Allowance for Doubtful Accounts account had a balance of $2,090,000 and $37,620 respectively. The transactions for 2018 are summarized as follows.
a. Sold $2,845,000 of merchandise (that had cost $1,730,000) on credit, terms n/30.
b. Wrote off $95,300 of uncollectible accounts receivable.
c. Received $1,825,200 cash from accounts receivable.
d. Recovered and collected $10,000 which had previously been written off as uncollectible accounts receivable.
e. In adjusting the accounts on December 31, the company estimated that 1.6% of accounts receivable will be uncollectible.
Required
Prepare journal entries to record Sunderland’s 2018 summarized transactions and its year-end adjustments to record bad debts expense. (The company uses the perpetual inventory system. Round amounts to the nearest dollar.)

Answer 1

Journal entries Sunderland’s 2018 transactions to be recorded as under:

Sr. No.	Date	General Journal	Debit	Credit
a.		Accounts Receivables A/c	$         2,845,000
		To Sales A/c		$          2,845,000
		(recorded sales for the period)
		Cost of goods sold A/c	$         1,730,000
		To Inventory A/c		$          1,730,000
		(recorded cost of goods sold for sales made for the period)
b.		Allowance for Doubtful Accounts A/c	$               37,620
		Bad debt expense A/c	$               57,680
		To Accounts Receivables A/c		$                95,300
		(recorded write off of $95,300 of uncollectible accounts receivables)
c.		Cash A/c	$         1,825,200
		To Accounts Receivables A/c		$          1,825,200
		(recorded collection of receivables)
d.		Accounts Receivables A/c	$               10,000
		To Allowance for Doubtful Accounts A/c		$                10,000
		(recorded reinstatement of written off debt as it is collected now)
		Cash A/c	$               10,000
		To Accounts Receivables A/c		$                10,000
		(recorded collection of receivables)
e.		Bad debt expense A/c	$               38,232
		To Allowance for Doubtful Accounts A/c		$                38,232
		(recorded allowance for doubtful accounts @ 1.6% of accounts receivables)

Explanation:

a. Entry for recording sales made and cost of goods sold is made at their respective values.

b. $95,300 of uncollectible accounts receivable is written off. Balance in Allowance for Doubtful Accounts A/c is $37,620 as mentioned in the information provided. So $ 57,680 ( $95,300 - 37,620) is charged to Bad debt expense A/c

c. Entry for recording collection from accounts receivables is made as per the information mentioned.

d. When recovery of  previously written off uncollectible accounts receivable is done then first reinstatement of accounts receivable a/c is done for that amount which is recovered i.e. $10,000 in this case. Then its recovery in cash is recorded.

e. To calculate the amount of Allowance for Doubtful Accounts for the uncollected accounts receivables at the end of the year, first balance of these two accounts is to be calculated as under:

Particulars	Accounts Receivable account	Allowance for Doubtful Accounts
Opening balance	2,090,000	37,620
transactions during the year for entry
a.	$   2,845,000	0
b.	$       (95,300)	$ (37,620)
c.	$ (1,825,200)	0
d.	$                   -	$   10,000
Closing balance	3,014,500	10,000

Here 1.6% of Accounts Receivable is to be provided as allowance for doubtful accounts

Allowance for Doubtful Accounts to be provided = (Balance of Accounts Receivable * rate of allowance for doubtful accounts ) - Balance of Allowance for Doubtful Accounts

= ($ 3,014,500 * 1.6%) - 10,000

= $ 38,232