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 Sold $1,348,400 of merchandise (that had cost $975,100) on credit, terms n/30. Wrote off $19,900 of uncollectible accounts receivable. Received $671,100 cash in payment of accounts receivable. In adjusting the accounts on December 31, the company estimated that 3.00% of accounts receivable would be uncollectible. Year 2 Sold $1,500,700 of merchandise (that had cost $1,343,400) on credit, terms n/30. Wrote off $28,700 of uncollectible accounts receivable. Received $1,157,400 cash in payment of accounts receivable. In adjusting the accounts on December 31, the company estimated that 3.00% 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. (The company uses the perpetual inventory system and it applies the allowance method for its accounts receivable.) (Round

Answer and Explanation:

The Journal entry is shown below:-

1. a Accounts receivable Dr, $1,348,400

       To Sales $1,348,400

(Being  sales revenue is recorded)

b. Cost of good sold Dr, $975,100

      To Merchandise inventory $975,100

(Being cost of goods sold is recorded)

2. Allowance for doubtful accounts Dr, $19,900

      To Accounts receivable $19,900

(Being allowance for doubtful debt is recorded)

3. Cash Dr, $671,100

       To Accounts receivable $671,100

(Being cash receipt is recorded)

4. Bad debts expense Dr, $39,622  

($1,348,400 - $671,100 - $19,900) × 3% + $19,900

      To Allowance for doubtful accounts $39,622

(Being bad debt expense is recorded)

5. a. Accounts receivable Dr, $1,500,700

              To Sales $1,500,700

(Being  sales revenue is recorded)

b. Cost of good sold Dr, $1,343,400

             To Merchandise inventory $1,343,400

(Being cost of goods sold is recorded)

6. Allowance for doubtful accounts Dr, $28,700

          To Accounts receivable $28,700

(Being allowance for doubtful debts is recorded)

7. Cash Dr, $1,157,400

         To Accounts receivable $1,157,400

(Being cash receipts is recorded)

8. Bad debts expense Dr, $38,138 ($972,000 × 3%) + $8,978

           To Allowance for doubtful accounts $38,138

(Being bad debt expense is recorded)

Working note

Ending receivables

= (Sale value of merchandise - written off amount - received cash) + year 2 Sale value of merchandise - year 2 written off amount - year 2 received cash

= ($1,348,400 - $19,900 - $671,100) + $1,500,700 - $28,700 - $1,157,400

= $657,400 + $1,500,700 - $28,700 - $1,157,400

= $972,000

Ending allowance balance before adjustment

= ($657,400 × 3%) - $28,700

= $8,978 balance of debit

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