Chapter 8, Problem 2AP

a.

To determine

Prepare the journal entries to record the credit sales, the collection on account and the preceding transactions and adjustments.

Explanation of Solution

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Prepare the journal entries to record the credit sales, the collection on account and the preceding transactions and adjustments as follows:

Journal entry for credit sales:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts receivable	1,173,000
	Sales Revenue		1,173,000
	(To record the credit sales)

Table (1)

• Accounts receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $1,173,000.
• Sales revenue is a component of stockholders’ equity, and it is increased. Therefore, credit sales revenue account for $1,173,000.

Journal entry for collections on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	1,175,000
	Accounts receivable		1,175,000
	(To record the collections on account)

Table (2)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $1,175,000.
• Accounts receivable is a current asset and it is decreased. Therefore, credit accounts receivable account for $1,175,000.

Journal entry for written-off R’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 17	Allowance for doubtful accounts	4,000
	Accounts receivable – Company		4,000
	(To write off the Company R’s account)

Table (3)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $4,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $4,000.

Journal entry for written-off G’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
May, 28	Allowance for doubtful accounts	2,400
	Accounts receivable – Company G		2,400
	(To write off the Company G’s account)

Table (4)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $2,400.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $2,400.

Journal entry for reinstate G’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
October, 13	Accounts receivable – Company G	600
	Allowance for doubtful accounts (1)		600
	(To reinstate the Company G’s account to the extent of the recovery)

Table (5)

• Accounts receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $600.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $600.

Journal entry to record the receipt of cash:

Date	Account Title and Explanation	Debit ($)	Credit ($)
October, 13	Cash	600
	Accounts receivable – Company G		600
	(To record the collection of cash on account.)

Table (6)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $600.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $600.

Journal entry for written-off K’s account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 15	Allowance for doubtful accounts	1,600
	Accounts receivable – Company K		1,600
	(To write off the Company K’s account)

Table (7)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $1,600.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,600.

Adjusting entry to record the bad debts expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Bad Debts Expense (E–)	10,557
	Allowance for doubtful debts accounts (A–)		10,557
	(To record the adjusting entry of bad debts expense)

Table (8)

Working note:

Calculate allowance for doubtful accounts.

$\begin{array}{c}\text{Allowance for Doubtful Debts = Credit sales}\times \text{Precentage of uncollectible amount}\\ \text{= \$1,173,000 }\times 0.9\text{\%}\\ \text{= \$10,557}\end{array}$ (1)

• Bad debts expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $10,557.
• Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for 10,557.

b.

To determine

Show the accounts receivable and the allowance for doubtful accounts would appear on the December 31^st Balance sheet.

Explanation of Solution

Company W
Balance Sheet
As on December 31st
Particulars	Amount ($)	Amount ($)
Assets:
Current assets:
Accounts receivable (Ending balance)	112,000
Less: Allowance for doubtful (Closing balance)	11,157	100,843

Table (9)

Working notes:

Calculate ending accounts receivable amount.

Accounts Receivable Account
Date	Particulars	Debit ($)		Date	Particulars	Credit ($)
					Cash	2,000
	Beginning balance	$122,000			Write-off – Company R	4,000
	Reinstate – Company G	600			Write-off – Company G	2,400
					Write-off – Company K	1,600
					Cash	600
					Closing Balance	112,000
	Total	122,600			Total	122,600

Table (10)

(2)

Calculate the amount of accounts receivable during the year.

$\begin{array}{c}\begin{array}{l}\text{During the year }\\ \text{accounts receivable}\end{array})=\text{Credit sales – Collections on account}\\ =\$1,173,000–\$1,175,000\\ =-\$2,000\end{array}$ (3)

Calculate ending balance of allowance for doubtful accounts.

Allowance for Doubtful Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Write-off – Company R	4,000			Beginning balance	8,000
	Write-off – Company G	2,400			Bad Debts Expense	10,557
	Write-off – Company K	1,600			Reinstate – Company G	600
	Closing Balance	11,157
	Total	19,157			Total	19,157

Table (11)

Note: Accounts for doubtful debts account is a contra-asset account with a normal credit balance. Any increase is credited and decrease in it is debited.

(4)