Chapter 8, Problem 7AP

a.

To determine

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

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.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts receivable	2,346,000
	Sales Revenue		2,346,000
	(To record the credit sales)

Table (1)

• Account receivable is a current asset, and it is increased. Therefore, debit accounts receivable account for $2,346,000.
• Sales revenue is a component of stockholders’ equity, and it is increased. Therefore, credit sales revenue account for $2,346,000.

Prepare the journal entry for collections on account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	2,350,000
	Accounts receivable		2,350,000
	(To record the collections on account)

Table (2)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $2,350,000.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $2,350,000.

Prepare the journal entry to record for written-off RS’s account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
February, 17	Allowance for doubtful accounts	7,500
	Accounts receivable – Company RS		7,500
	(To write off the Company RS’s account)

Table (3)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $7,500.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $7,500.

Prepare the Journal entry to record written-off G’s account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May, 28	Allowance for doubtful accounts	4,800
	Accounts receivable – Company G		4,800
	(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 $4,800.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $4,800.

Prepare the journal entry to record reinstate G’s account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October, 13	Accounts receivable – Company G	1,200
	Allowance for doubtful accounts		1,200
	(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 $1,200.

Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $1,200.

Prepare the Journal entry to record the receipt of cash.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October, 13	Cash	1,200
	Accounts receivable – Company G		1,200
	(To record the collection of cash on account.)

Table (6)

• Cash is a current asset, and it is increased. Therefore, debit cash account for $1,200.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $1,200.

Prepare the journal entry to record written-off RC’s account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December, 15	Allowance for doubtful accounts	4,500
	Accounts receivable – Company RC		4,500
	(To write off the Company RC’s account)

Table (7)

• Allowance for doubtful accounts is a contra asset, and it is decreased. Therefore, debit allowance for doubtful accounts for $4,500.
• Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $4,500.

Prepare the adjusting entry to record the bad debts expense.

Date	Account Title and Explanation	Debit ($)	Credit ($)
December 31	Bad Debts Expense	16,422
	Allowance for doubtful debts accounts		16,422
	(To record the adjusting entry of bad debts expense)

Table (8)

Working note:

Calculate allowance for doubtful accounts.

$\begin{array}{c}\text{Allowance for Doubtful Debts = 0}\text{.8\% of credit sales}\\ \text{= \$2,346,000 }\times 0.7\text{\%}\\ \text{= \$16,422}\end{array}$ (1)

Bad debts expense is a component of stockholders’ equity, and it is decreased. Therefore, debit bad debts expense account for $16,422.

Allowance for doubtful accounts is a contra asset, and it is increased. Therefore, credit allowance for doubtful accounts for $16,422.

b.

To determine

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

Explanation of Solution

Company H
Balance Sheet
As on December 31st
Details	Amount ($)	Amount ($)
Assets:
Current assets:
Accounts receivable (Ending balance)	243,200
Less: Allowance for doubtful (Closing balance)	16,622	226,578

Table (9)

Working notes:

Calculate the ending balance of accounts receivable.

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	$264,000			During the year collection	4,000
	Reinstate – Company G	1,200			Write-off – Company RS	7,500
					Write-off – Company G	4,800
					Write-off – Company RC	4,500
					Cash	1,200
					Closing Balance	243,200
	Total	265,200			Total	265,200

Table (10)

(2)

Calculate the accounts receivable amount during the year.

$\begin{array}{c}\begin{array}{l}\text{Accounts receivable }\\ \text{during the year }\end{array})=\text{ Credit sales – Collections on account}\\ =\$2,346,000–\$2,350,000\\ =(\$4,000)\end{array}$ (3)

Calculate the ending balance of allowance for doubtful accounts.

Allowance for Doubtful Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Write-off – Company RS	7,500			Beginning balance	15,800
	Write-off – Company G	4,800			Bad Debts Expense	16,422
	Write-off – Company RC	4,500			Reinstate – Company G	1,200
	Closing Balance	16,622
	Total	33,422			Total	33,422

Table (11)

(4)