Chapter 8, Problem 2BP

a.

To determine

Prepare the journal entries to record the credit sales, the collection on account and the preceding transactions and adjustments.

Explanation of Solution

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Prepare the journal entries to record the credit sales, the collection on account and the preceding transactions and adjustments as follows:

Journal entry for credit sales:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts receivable	810,000
	Sales Revenue		810,000
	(To record the credit sales)

Table (1)

Accounts receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $810,000.

Sales revenue is a component of stockholders’ equity, and it is increased. Therefore, credit sales revenue account for $810,000.

Journal entry for collections on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	794,000
	Accounts receivable		794,000
	(To record the collections on account)

Table (2)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $794,000.
• Accounts receivable is a current asset and it is decreased. Therefore, credit accounts receivable account for $794,000.

Journal entry for written-off J’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January, 11	Allowance for doubtful accounts	3,000
	Accounts receivable – Company J		3,000
	(To write off the Company J’s account)

Table (3)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $3,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $3,000.

Journal entry for written-off B’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
April, 29	Allowance for doubtful accounts	1,000
	Accounts receivable – Company B		1,000
	(To write off the Company B’s account)

Table (4)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,000.

Journal entry for reinstate B’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
November, 15	Accounts receivable – Company B	1,000
	Allowance for doubtful accounts (1)		1,000
	(To reinstate the Company B’s account to the extent of the recovery)

Table (5)

• Accounts receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $1,000.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $1,000.

Journal entry to record the receipt of cash:

Date	Account Title and Explanation	Debit ($)	Credit ($)
November, 15	Cash	1,000
	Accounts receivable – Company B		1,000
	(To record the collection of cash on account.)

Table (6)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $1,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,000.

Journal entry for written-off D’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 5	Allowance for doubtful accounts	2,250
	Accounts receivable – Company D		2,250
	(To write off the Company D’s account)

Table (7)

Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $2,250.

Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $2,250.

Adjusting entry to record the bad debts expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Bad Debts Expense	8,100
	Allowance for doubtful debts accounts		8,100
	(To record the adjusting entry of bad debts expense)

Table (8)

Working note:

Calculate allowance for doubtful accounts.

$\begin{array}{c}\text{Allowance for Doubtful Debts = Credit sales}\times \text{Precentage of uncollectible amount}\\ \text{= \$810,000 }\times 1\text{\%}\\ \text{= \$8,100}\end{array}$ (1)

Bad debts expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $8,100.

Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for 8,100.

b.

To determine

Show the accounts receivable and the allowance for doubtful accounts would appear on the December 31^st Balance sheet.

Explanation of Solution

Company G
Balance Sheet
As on December 31st
Particulars	Amount ($)	Amount ($)
Assets:
Current assets:
Accounts receivable (Ending balance)	139,750
Less: Allowance for doubtful (Closing balance)	9,850	129,900

Table (9)

Working notes:

Calculate ending accounts receivable amount.

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	$130,000			Write-off – Company J	3,000
	During the year account receivable	16,000			Write-off – Company B	1,000
	Reinstate – Company B	1,000			Write-off – Company D	2,250
					Cash	1,000
					Closing Balance	139,750
	Total	147,000			Total	147,000

Table (10)

(2)

Calculate the amount of accounts receivable during the year.

$\begin{array}{c}\begin{array}{l}\text{During the year }\\ \text{accounts receivable}\end{array})=\text{Credit sales – Collections on account}\\ =\$810,000–\$794,000\\ =\$16,000\end{array}$ (3)

Calculate ending balance of allowance for doubtful accounts.

Allowance for Doubtful Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Write-off – Company J	3,000			Beginning balance	7,000
	Write-off – Company B	1,000			Bad Debts Expense	8,100
	Write-off – Company D	2,250			Reinstate – Company B	1,000
	Closing Balance	9,850
	Total	15,910			Total	16,100

Table (11)

Note: Accounts for doubtful debts account is a contra-asset account with a normal credit balance. Any increase is credited and decrease in it is debited.

(4)