Chapter 6, Problem 2P

1.

To determine

Prepare necessary journal entries for the given transaction assuming that accounts receivable and sales are recorded at gross price by the Company L.

Explanation of Solution

Account receivable:

The amount of money to be received by a company for the sale of goods and services to the customers is referred to as account receivable.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Accounts receivable	70,000
	Sales revenue		70,000
	(To record the sale made )

Table (1)

• Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $70,000.
• Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, credit the sales revenue by $70,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash (1)	45,080
	Sales revenue $\left(\$46,000\times \frac{2}{100}\right)$	920
	Accounts receivable		46,000
	(To record the collection received on December 18, 2016)

Table (2)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $45,080.
• Sales revenue is component of stockholder’s equity and there is a decrease in the value of revenue. Hence, debit the sales revenue by $920.
• Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $46,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash	18,000
	Accounts receivable		18,000
	(To record the additional collection on the sales made)

Table (3)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $18,000.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $18,000.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Return liability	1,500
	Accounts receivable		1,500
	(To record the sales returns on credit  merchandise)

Table (4)

• Return liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $1,500.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the asset by $1,500.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	No  entry is required for the bank error

Table (5)

Date	Account Titles and explanation	Debit ($)	Credit ($)
	No  entry is required for the bank error

Table (6)

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash	4,500
	Accounts receivable(2)		4,500
	(To record the additional collection on the sales made)

Table (7)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $4,500.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $4,500.

Working note:

(1) Calculate the cash to be received on sales made.

$\begin{array}{c}\text{Cash = }\left(\text{Original billing of sales}\right)\times \left(\frac{100-\text{Percentage of discount}}{100}\right)\\ =\$46,000\times \left(\frac{100-2}{100}\right)\\ =\$46,000\times 0.98\\ =\$45,080\end{array}$

(2) Calculate the amount of accounts receivable.

$\begin{array}{c}\text{Collection received =}\left(\begin{array}{l}\text{Sale of merchandise}-\text{Merchandise originally billed }\\ -\text{ Additional collections received}-\text{ Return on sales made}\end{array}\right)\\ =\$70,000-\$46,000-\$18,000-\$1,500\\ =\$4,500\end{array}$

Note: In this case, $\frac{2}{10}$ (2 %) discount is given for accounts receivable, if it is paid within 10 days.

2.

To determine

Prepare necessary journal entries for the given transaction assuming that accounts receivable and sales are recorded at net price by the Company L.

Explanation of Solution

Account receivable:

The amount of money to be received by a company for the sale of goods and services to the customers is referred to as account receivable.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Accounts receivable $\left(\$70,000\times 0.98\right)$	68,600
	Sales revenue		68,600
	(To record the sale made )

Table (8)

• Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $68,600.
• Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, credit the sales revenue by $68,600.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash $\left(\$46.000\times 0.98\right)$	45,080
	Accounts receivable		45,080
	(To record the additional collection on the sales made)

Table (9)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $45,080.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $45,080.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash	18,000
	Sales revenue  $\left(\$18,000\times \frac{2}{100}\right)$		360
	Accounts receivable $\left(\$5,000-\$100\right)$		17,640
	(To record the collection received  on sale made)

Table (10)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $18,000.
• Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, debit the sales revenue by $17,640.
• Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $360.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Return liability	1,470
	Accounts receivable $\left(\$1,500\times 0.98\right)$		1,470
	(To record the sales returns on credit  merchandise)

Table (11)

• Return liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $1,470
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the asset by $1,470.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Accounts receivable	90
	Sales revenue $\left(\$4,500\times 0.02\right)$		90
	(To record the sale made )

Table (12)

• Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $90.
• Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, credit the sales revenue by $90.

Date	Account Titles and explanation	Debit ($)	Credit ($)
	No  entry is required

Table (13)

Date	Account Titles and explanation	Debit ($)	Credit ($)
	Cash	4,500
	Accounts receivable(2)		4,500
	(To record the additional collection on the sales made)

Table (14)

• Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $4,500.
• Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $4,500.

3.

To determine

Compute the account receivable balance that will be reported on the balance sheet Company L’s as on December 31, 2016, when the accounts receivable and sales are recorded at

(a) Gross price

(b) Net price

Explanation of Solution

(a) Compute the account receivable balance that will be reported on the balance sheet Company L’s as on December 31, 2016, when the accounts receivable and sales are recorded at gross price.

$\begin{array}{c}\text{Accounts receivable =}\left(\begin{array}{l}\text{Sale of merchandise}-\text{Merchandise originally billed }\\ -\text{ Additional collections received}-\text{ Return on sales made}\end{array}\right)\\ =\$70,000-\$46,000-\$18,000-\$1,500\\ =\$4,500\end{array}$

(b) Compute the account receivable balance that will be reported on the balance sheet Company L’s as on December 31, 2016, when the accounts receivable and sales are recorded at net price.

$\begin{array}{c}\text{Accounts receivable =}\left(\begin{array}{l}\text{Sale of merchandise}-\text{Collections received }\\ -\text{ Additional collections received}-\text{ Return on sales made + }\\ \text{Sales revenue}\end{array}\right)\\ =\$68,600-\$45,080-\$17,640-\$1,470+90\\ =\$4,500\end{array}$