Chapter 6, Problem 7P

To determine

Prepare the journal entries for each of the transactions.

Explanation of Solution

Sales are an activity of selling the merchandise inventory of a business.

Prepare the journal entry.

Date	Account titles and explanation	Debit ($)	Credit ($)
(a)	Cash	235,000
	Sales revenue		235,000
	(To record the sale of merchandise for cash)
(b)	Accounts receivable	11,500
	Sales revenue		11,500
	(To record the sale of merchandise on account)
(c)	Accounts receivable	26,500
	Sales revenue		26,500
	(To record the sale of merchandise on account)
(d)	Sales returns and allowances	500
	Accounts receivable		500
	(To record the sales return and allowance)
(e)	Accounts receivable	24,000
	Sales revenue		24,000
	(To record the sale of merchandise on account)
(f)	Cash	10,780 (2)
	Sales discounts	220 (1)
	Accounts receivable		11,000
	(To record the collection of cash on account within the period)
(g)	Cash	98,000
	Sales discounts	2,000 (4)
	Accounts receivable		100,000 (3)
	(To record the collection of cash on account within the period)
(h)	Cash	25,970 (6)
	Sales discounts	530 (5)
	Accounts receivable		26,500
	(To record the collection of cash on account within the period)
(i)	Accounts receivable	19,000
	Sales revenue		19,000
	(To record the sale of merchandise on account)
(j)	Sales returns and allowances	3,500 (7)
	Cash		3,430 (9)
	Sales discounts		70 (8)
	(To record the sales returns and allowances)
(k)	Cash	6,000
	Accounts receivable		6,000
	(To record the collection of cash on account after the period)
(l)	Allowance for doubtful account	3,000
	Account receivable		3,000
	(To record the write-off of uncollectible account receivable )
(m)	Bad debt expense	1,155 (10)
	Allowance for doubtful accounts		1,155
	(To record the bad debt expense)

Table (1)

Working Notes:

Calculate sales discount of 2% for the amount of $11,000 collected from R.

$\begin{array}{c}\text{Sales discount = Sales }\times \text{ 2\% discount}\\ \text{= \$11,000}\times 2\text{\%}\\ \text{= \$220}\end{array}$ (1)

Determine cash collected from R.

$\begin{array}{c}\text{Cash = Sales revenue – Credit card discounts}\\ =\$11,000–\$220\text{(1)}\\ =\$10,780\end{array}$ (2)

Calculate the total accounts receivable amount.

$\begin{array}{c}\text{Accounts}\text{receivable}\text{=}\frac{\$98,000}{98}\times 100\\ =100,000\end{array}$ (3)

Determine sales discount given to customer.

$\begin{array}{c}\text{Sales discount = Account receivable – Cash received}\\ =\$100,000(3)–\$98,000\\ =\$2,000\end{array}$ (4)

Calculate sales discount of 2% for the amount of $26,500 collected from M.

$\begin{array}{c}\text{Sales discount = Sales }\times \text{ 2\% discount}\\ \text{= \$26,500}\times 2\text{\%}\\ \text{= \$530}\end{array}$ (5)

Determine cash collected from M.

$\begin{array}{c}\text{Cash = Sales revenue – Credit card discounts}\\ =\$26,500–\$530\text{(5)}\\ =\$25,970\end{array}$ (6)

Calculate the amount of sales returns made from M.

$\begin{array}{c}\text{Sales return =}\text{Number of items return}\times \text{Unit sales price}\\ =7\times \$500\\ \text{= \$3,500}\end{array}$ (7)

Calculate sales discount of 2% for the amount of $3,500.

$\begin{array}{c}\text{Sales discount = Sales return }\times \text{ 2\% discount}\\ \text{= \$3,500}\text{(7)}\times 2\text{\%}\\ \text{= \$70}\end{array}$ (8)

Determine cash returned to M.

$\begin{array}{c}\text{Cash = Sales return – Sales discounts}\\ =\$3,500\text{(7)}–\$70\text{(8)}\\ =\$3,430\end{array}$ (9)

Calculate the bad debt expense.

$\begin{array}{c}\text{Bad debt expense = Net}\text{Sales}\times 1.5\text{\% Bad debt rate}\\ \text{= \$77,000}\text{(11)}\times 1.5\text{\%}\\ \text{= \$1,155}\end{array}$ (10)

Calculate the net sales.

$\begin{array}{c}\text{Calculate net sales = Credit sales}-\text{Sales returns}\\ \text{= }\left[\left(\$11,500+\$26,500+\$24,000+\$19,000\right)-\left(\$500+\$3,500\right)\right]\\ \text{= \$81,000}-\$4,000\\ =\$77,000\end{array}$ (11)

2.

To determine

Show how the accounts related to the preceding sale and collection activity should be shown on the income statement.

Explanation of Solution

Income statement: This is a financial statement that shows the net income earned or net loss suffered by a Company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Show the accounts related to the preceding sale and collection activity should be shown on the income statement.

Company S
Income Statement
As of December 31
Particulars	Amount  ($)
Sales Revenue $\left[\$235,000+\$11,500+\$26,500+\$24,000+\$19,000\right]$	316,000
Less: Sales Returns and Allowances $\left(\$3,500+\$500\right)$	4,000
Less: Sales Discount $\left(\$220+\$2,000+\$530-\$70\right)$	2,680
Net Sales Revenue	309,320
Operating Expenses:
Bad Debt Expense	1,155

Table (2)