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
1. Sold $1,348,100 of merchandise (that had cost $981,200) on credit, terms n/30.
2. Wrote off $20,700 of uncollectible accounts receivable.
3. Received $667,100 cash in payment of accounts receivable.
4. In adjusting the accounts on December 31, the company estimated that 1.60% of accounts receivable would be uncollectible.
Year 2
1. Sold $1,557,000 of merchandise (that had cost $1,347,300) on credit, terms n/30.
2. Wrote off $28,600 of uncollectible accounts receivable.
3. Received $1,241,900 cash in payment of accounts receivable.
4. In adjusting the accounts on December 31, the company estimated that 1.60% 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.

Answer and Explanation:

The journal entries are shown below;

For the year 1

1. Accounts receivable $1,348,100

         To Sales$1,348,100

(Being the sale of merchandise is recorded)

Cost of good sold$981,200

         To Merchandise inventory$981,200

(Being the cost of merchandise is recorded)

2. Allowance for doubtful accounts$20,700  

                  To Accounts receivable$20,700

(Being the written off amount is recorded)

3. Cash$6,67,100  

      To Accounts receivable  $6,67,100

(Being the cash received is recorded)  

d.Bad debts expense   $31,264.80

              To Allowance for doubtful accounts   $31,264.80

(Being the bad debt expense is recorded)

The computation is shown below for bad debts

Sales                                                               $1,348,100

Less:  cash collection                                   -$667,100

Less: written off amount                                -$20,700

Ending balance of account receivable        $660,300

1.60% of account receivable                          $10,564.80

Add: debit balance                                          $20,700

bad debt expense                                           $31,264.80

For the year 2

1. Accounts receivable $1,557,000

         To Sales$1,557,000

(Being the sale of merchandise is recorded)

Cost of good sold$1,347,300

         To Merchandise inventory $1,347,300

(Being the cost of merchandise is recorded)

2. Allowance for doubtful accounts$28,600

                  To Accounts receivable$28,600

(Being the written off amount is recorded)

3. Cash  $1,241,900

      To Accounts receivable  $1,241,900

(Being the cash received is recorded)  

d.Bad debts expense   $33,184

              To Allowance for doubtful accounts   $33,184

(Being the bad debt expense is recorded)

The computation of the bad debt expense is shown below;

beginning balance of account receivable     $660,300

Add: Sales                                                        $1,557,000

Less:  cash collection                                      -$1,241,900

Less: written off amount                                  -$28,600

Ending balance of account receivable          $948,600

1.60% of account receivable                            $15,148.80

Add: debit balance ($28,600 -   $10,564.80)   $18,035.20

Year end adjustment                                          $33,184