Financial and Managerial Accounting
Financial and Managerial Accounting
7th Edition
ISBN: 9781259726705
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 7, Problem 4PSA
To determine

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

  • Assets: Increase in asset should be debit and decrease should be credit.
  • Liabilities: Increase in liabilities should be credit and decrease should be debit.
  • Equity: Increase in Equity should be credit and decrease should be debit.
  • Expense: Increase in expense should be debit and decrease should be credit.
  • Revenue: Increase in revenue should be credit and decrease should be debit.

Accounts Receivable:

It refers to the amount that is to be received by a company for providing goods and services on credit. It is an asset account.

Bad Debts:

It refers to the amount that was expected to be received on credit sales but went uncollectible. It is a loss to the company.

Perpetual Inventory System:

It refers to the system to record the transaction related to inventories at the time of their occurrence. Each sale and purchase is recorded at the time they occurred.

To prepare: Adjustment entry to record the given transactions for uncollectible.

Expert Solution & Answer
Check Mark

Explanation of Solution

a.

Sold $1,345,434 of merchandise (that has cost $975,000) on credit, terms n/30.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Accounts Receivables 1,345,434
Sales 1,345,434
(Being sales of $1,345,434 on credit is recorded )

Table(1)

  • Since, the sales of merchandise on credit will increase the value of accounts receivables and accounts receivable is an asset account, it is debited when it is increased.
  • Since, the sales of merchandise would increase the value of sales in the company and sales are revenue account, it is credited when it is increased.
Date Account Title and Explanation Post ref Debit ($) Credit ($)
Cost of Goods Sold 975,000
Merchandise Inventory 975,000
(Being cost of goods sold is recorded )

Table(2)

  • Since, the cost of merchandise sold is $975,000 and company is using perpetual inventory system.
  • Merchandise inventory account is credited as it is an asset account and it has decreased.

b.

Wrote off $18,300 of uncollectible accounts receivable.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Bad Debt Expense 18,300
Accounts Receivable 18,300
(Being entry is made to record the write off of uncollectible accounts receivable)

Table(3)

  • Since, bad debt expense is an expense account as it is a loss to a company, it is debited with the increase in it.
  • Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account, it is credited with the decrease in it.

c.

Received $669,200 cash in payment of accounts receivable.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Cash 669,200
Account Receivable 669,200
(Being payment from an account receivable is recorded)

Table(4)

  • Since, payment from an accounts receivable will increase the cash and cash is an asset account, it is debited when it is increased.
  • Since, payment from an accounts receivable will decrease the accounts receivable and accounts receivable is an asset account, it is credited when it is decreased.

d.

In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Bad Debt Expense 28,169
Accounts Receivable 28,169
(Being entry is made to record the write off of uncollectible accounts receivable)

Table(5)

  • Since, bad debt expense is an expense account as it is a loss to a company, it is debited with the increase in it.
  • Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account, it is credited with the decrease in it.

Working note:

Calculation of closing balance of receivables,

Particulars Amount ($)
Total credit sales 1,345,434
Less: Collections (669,200)
Amount written off (18,300)
Total closing balance 657,934

Table(6)

Thus, the ending balance of accounts receivable for the year 2016 is $657,934.

Formula to calculate bad debt expense is,
BadDebtExpense=[ ( AccountReceivable×PercentageofUncollectible ) ±BalanceBeforeAdjustment ]

Substitute $657,934 for accounts receivable, 1.5% for percentage for uncollectible and $18,300 for balance before adjustment.
BadDebtExpense=( $657,934×1.5% )+$18,300 =$9,869+$18,300 =$28,169

e.

Sold $1,525,634 of merchandise on credit (that had cost $1,250,000) terms n/30.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Accounts Receivables 1,525,634
Sales 1,525,634
(Being sales of $1,525,634on credit is recorded )

Table(7)

  • Since, the sales of merchandise on credit will increase the value of accounts receivables and accounts receivable is an asset account, it is debited when it is increased.
  • Since, the sales of merchandise would increase the value of sales in the company and sales are revenue account, it is credited when it is increased.
Date Account Title and Explanation Post ref Debit ($) Credit ($)
Cost of Goods Sold 1,250,000
Merchandise Inventory 1,250,000
(Being cost of goods sold is recorded )

Table(8)

  • Since, the cost of merchandise sold is $1,250,000 and company is using perpetual inventory system.
  • Merchandise inventory account is credited as it is an asset account and it has decreased.

f.

Wrote off $27,800 of uncollectible accounts receivable.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Bad Debt Expense 27,800
Accounts Receivable 27,800
(Being entry is made to record the write off of uncollectible accounts receivable)

Table(9)

  • Since, bad debt expense is an expense account as it is a loss to a company, it is debited with the increase in it.
  • Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account, it is credited with the decrease in it.

g.

Received $1,204,600 cash in payment of accounts receivable.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Cash 1,204,600
Account Receivable 1,204,600
(Being payment from an account receivable is recorded)

Table(10)

  • Since, payment from an accounts receivable will increase the cash and cash is an asset account, it is debited when it is increased.
  • Since, payment from an accounts receivable will decrease the accounts receivable and accounts receivable is an asset account, it is credited when it is decreased.

h.

In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
2017 Bad Debt Expense 32,199
Accounts Receivable 32,199
(Being entry is made to record the write off of uncollectible accounts receivable)

Table(11)

  • Since, bad debt expense is an expense account as it is a loss to a company, it is debited with the increase in it.
  • Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account, it is credited with the decrease in it.

Working note:

Calculation of closing balance of receivables,

Particulars Amount ($)
Opening balance 657,934
Total credit Sales 1,525,634
Less: Collections (1,204,600)
Amount written off (27,800)
Total closing balance 951,168

Table(12)

The ending balance of accounts receivable for the year 2017 is $951,168.

Formula to calculate bad debt expense is,
BadDebtExpense=[ ( AccountReceivable×PercentageofUncollectible ) ±BalanceBeforeAdjustment ]

Substitute $951,168 for accounts receivable, 1.5% for percentage for uncollectible and ( $27,800$9,869 )=$17,931 for balance before adjustment.
BadDebtExpense=( $951,168×1.5% )+$17,931 =$14,268+$17,931 =$32,199

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