Chapter 7, Problem 4PSB

To determine

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

► Assets: Increase in asset should be debit and decrease should be credit.

► Liabilities: Increase in liabilities should be credit and decrease should be debit.

► Equity: Increase in Equity should be credit and decrease should be debit.

► Expense: Increase in expense should be debit and decrease should be credit.

► Revenue: Increase in revenue should be credit and decrease should be debit.

Accounts Receivable:

It refers to the amount that is to be received by a company for providing goods and services on credit. It is an asset account.

Bad Debts:

It refers to the amount that was expected to be received on credit sales but went uncollectible. It is a loss to the company.

Perpetual Inventory System:

It refers to the system to record the transaction related to inventories at the time of their occurrence. Each sale and purchase is recorded at the time they occurred.

To prepare: Adjustment entry to record the given transactions for uncollectible.

Explanation of Solution

a.

Sold $685,350 of merchandise (that has cost $500,000) on credit, terms n/30.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Accounts Receivables		685,350
	Sales			685,350
	(Being sales of $685,350 on credit is recorded )

Table (1)

• Since, the sales of merchandise on credit will increase the value of accounts receivables and accounts receivable is an asset account. It is debited when it is increased.

• Since, the sales of merchandise would increase the value of sales in the company and sales is revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of Goods Sold		500,000
	Merchandise Inventory			500,000
	(Being cost of goods sold is recorded )

Table (2)

• Since, the cost of merchandise sold is $500,000 and company is using perpetual inventory system.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

b.

Received $428,300 cash in payment of accounts receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
2016	Cash		482,300
	Account Receivable			482,300
	(Being payment from an account receivable is recorded)

Table (3)

• Since, payment from an accounts receivable will increase the cash and cash is an asset account. It is debited when it is increased.

• Since, payment from an accounts receivable will decrease the accounts receivable and accounts receivable is an asset account. It is credited when it is decreased.

c.

Wrote off $9,350 of uncollectible accounts receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Bad Debt Expense		9,350
	Accounts Receivable			9,350
	(Being entry is made to record the write off of uncollectible accounts receivable)

Table (4)

• Since, bad debt expense is an expense account as it is a loss to a company. It is debited with the increase in it.

• Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account. It is credited with the decrease in it.

d.

In adjusting the accounts on December 31, the company estimated that 1% of accounts receivable will be uncollectible.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Bad Debt Expense		11,287
	Accounts Receivable			11,287
	(Being entry is made to record the write off of uncollectible accounts receivable)

Table (5)

• Since, bad debt expense is an expense account as it is a loss to a company. It is debited with the increase in it.

• Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account. It is credited with the decrease in it.

Working note:

Calculation of closing balance of receivables,

Particulars	Amount ($)
Total credit sales	685,350
Less: Collections	(482,300)
Amount written off	(9,350)
Total closing balance	193,700

Table (6)

The ending balance of accounts receivable for the year 2014 is $193,700.

Formula to calculate bad debt expense is:

$\text{Bad}\text{debt}\text{expense}=\left[\begin{array}{l}\left(\text{Account}\text{receivable}\times \text{Percentage}\text{of}\text{uncollectible}\right)\\ \pm \text{Balance}\text{before}\text{adjustment}\end{array}\right]$

Substitute $193,700 for accounts receivable, 1% for percentage for uncollectible and $9,350 for balance before adjustment,

$\begin{array}{c}\text{Bad}\text{debt}\text{expense}=\left(\$193,700\times 1\%\right)+\$9,350\\ =\$1,937+\$9,350\\ =\$11,287\end{array}$

e.

Sold $870,220 of merchandise on credit (that had cost $650,000) terms n/30.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Accounts Receivables		870,220
	Sales			870,220
	(Being sales of $870,220on credit is recorded )

Table (7)

• Since, the sales of merchandise on credit will increase the value of accounts receivables and accounts receivable is an asset account. It is debited when it is increased.

• Since, the sales of merchandise would increase the value of sales in the company and sales are revenue account. It is credited when it is increased.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of Goods Sold		650,000
	Merchandise Inventory			650,000
	(Being cost of goods sold is recorded )

Table (8)

• Since, the cost of merchandise sold is $650,000 and company is using perpetual inventory system.

• Merchandise inventory account is debited as it is an asset account and it has decreased.

f.

Received $990,800 cash in payment of accounts receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cash		990,800
	Account Receivable			990,800
	(Being payment from an account receivable is recorded)

Table (9)

• Since, payment from an accounts receivable will increase the cash and cash is an asset account. It is debited when it is increased.

• Since, payment from an accounts receivable will decrease the accounts receivable and accounts receivable is an asset account. It is credited when it is decreased.

g.

Wrote off $11,090 of uncollectible accounts receivable.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Bad Debt Expense		11,090
	Accounts Receivable			11,090
	(Being entry is made to record the write off of uncollectible accounts receivable)

Table (10)

• Since, bad debt expense is an expense account as it is a loss to a company. It is debited with the increase in it.

• Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account. It is credited with the decrease in it.

h.

In adjusting the accounts on December 31, the company estimated that 1% of accounts receivable will be uncollectible.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Bad Debt Expense		9,773
	Accounts Receivable			9,773
	(Being entry is made to record the write off of uncollectible accounts receivable)

Table (11)

• Since, bad debt expense is an expense account as it is a loss to a company. It is debited with the increase in it.

• Since, the direct write off of bad debt expense will include the write off of uncollectible amount directly from accounts receivable which will reduce the amount for accounts receivable which is an asset account. It is credited with the decrease in it.

Working note:

Calculation of closing balance of receivables,

Particulars	Amount ($)
Opening balance	193,670
Total credit sales	870,220
Less: Collections	(990,800)
Amount written off	(11,090)
Total closing balance	62,000

Table (12)

The ending balance of accounts receivable for the year 2015 is $62,000.

Formula to calculate bad debt expense is:

$\text{Bad}\text{debt}\text{expense}=\left[\begin{array}{l}\left(\text{Account}\text{receivable}\times \text{Percentage}\text{of}\text{uncollectible}\right)\\ \pm \text{Balance}\text{before}\text{adjustment}\end{array}\right]$

Substitute $62,000 for accounts receivable, 1% for percentage for uncollectible and $\left(\$11,090-\$1,937\right)=\$9,153$ for balance before adjustment,

$\begin{array}{c}\text{Bad}\text{debt}\text{expense}=\left(\$62,000\times 1\%\right)+\$9,153\\ =\$620+\$9,153\\ =\$9,773\end{array}$