Chapter B, Problem 1P

To determine

Prepare the journal entries for Company R.

Explanation of Solution

Allowance method of accounting for bad debts expense: This is the accounting method used to estimate the bad debts based on an estimated percentage of credit sales, and recognize the bad debts expense in the same period the products are sold on account (period in which accounts receivables is created for).

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare the journal entries for Company R.

Transaction on December 31, 2012:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2012
December	31	Bad Debts Expense			3,270
			Allowance for Doubtful Accounts			3,270
		(Record uncollectible accounts expense)

Table (1)

Description:

• Bad Debts Expense is an expense account. Since expenses and losses decrease the equity and an increase in equity is debited, so, Bad Debts Expense account is debited.
• Allowance for Doubtful Accounts is a contra-asset account to Accounts Receivable account. The contra-asset accounts decrease the asset value, and a decrease in asset is credited.

Working Notes:

Compute bad debts expense.

$\begin{array}{c}\text{Bad debts expense = Credit sales×Uncollectible percentage}\\ \text{=\$327,000×1\%}\\ \text{=\$3,270}\end{array}$

Transaction on March 2, 2013:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2013
March	2	Allowance for Doubtful Accounts			584
			Accounts Receivable			584
		(Record the write off of accounts receivable that is worthless)

Table (2)

Description:

• Allowance for Doubtful Accounts is a contra-asset account to Accounts Receivable account. The account is debited to write off the receivable and reverse the effect of allowance value of the doubtful account which was previously credited.
• Accounts Receivable is an asset account. Since the receivable is written off, the value of asset is decreased, and a decrease in asset is credited.

Transaction on June 6, 2013:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2013
June	6	Allowance for Doubtful Accounts			492
			Accounts Receivable			492
		(Record the write off of accounts receivable that is worthless)

Table (3)

Description:

• Allowance for Doubtful Accounts is a contra-asset account to Accounts Receivable account. The account is debited to write off the receivable and reverse the effect of allowance value of the doubtful account which was previously credited.
• Accounts Receivable is an asset account. Since the receivable is written off, the value of asset is decreased, and a decrease in asset is credited.