Chapter 6, Problem 6.1AP

Reporting Net Sales and Expenses with Discounts, Returns, and Bad Debts (P6-1)

The following data were selected from the records of Sharkim Company for the year ended December 31, current year.

Balances January 1, current year:
Accounts receivable (various customers)	$116,000
Allowance for doubtful accounts	5,200

In the following order, except for cash sales, the company sold merchandise and made collections on credit terms 2/10, n/30 (assume a unit sales price of $500 in all transactions and use the gross method to record sales revenue).

Transactions during 2014

1. a. Sold merchandise for cash, $227,000.
2. b. Sold merchandise to Karen Corp.; invoice price, $12,000.
3. c. Sold merchandise to White Company; invoice price, $23,500.
4. d. Karen paid the invoice in (b) within the discount period.
5. e. Sold merchandise to Cavendish Inc.; invoice price, $26,000.
6. f. Two days after paying the account in full, Karen returned one defective unit and received a cash refund.
7. g. Collected $88,200 cash from customer sales on credit in prior year, all within the discount periods.
8. h. Three days after purchase date, White returned seven of the units purchased in (c) and received account credit.
9. i. White paid its account in full within the discount period.
10. j. Sold merchandise to Delta Corporation; invoice price, $18,500.
11. k. Cavendish (e) paid its account in full after the discount period.
12. l. Wrote off a prior year account of $2,400 after deciding that the amount would never be collected.
13. m. The estimated bad debt rate used by the company was 4 percent of credit sales net of returns.

Required:

1. 1. Using the following categories, indicate the effect of each listed transaction, including the write-off of the uncollectible account and the adjusting entry for estimated bad debts (ignore cost of goods sold). Indicate the sign and amount of the effect or use “NE” to indicate “no effect.” The first transaction is used as an example.

   (a)

Sales Revenue	Sales Discounts (taken)	Sales Returns and Allowances	Bad Debt Expense
+227,000	NE	NE	NE

2. Show how the accounts related to the preceding sale and collection activities should be reported on the 2014 income statement. (Treat sales discounts as a contra-revenue.)