Question

Liang Company began operations on January 1, 2016. During its first two years, the company completed a number of transactions involving sales on credit, accounts receivable collections, and bad debts. These transactions are summarized as follows.

2016

a. Sold \(1,345,434 of merchandise (that had cost \)975,000) on credit, terms n/30.

b. Wrote off \(18,300 of uncollectible accounts receivable.

c. Received \)669,200 cash in payment of accounts receivable.

d. In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.

2017

e. Sold \(1,525,634 of merchandise on credit (that had cost \)1,250,000), terms n/30.

f. Wrote off \(27,800 of uncollectible accounts receivable.

g. Received \)1,204,600 cash in payment of accounts receivable.

h. In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.

Required

Prepare journal entries to record Liang’s 2016 and 2017 summarized transactions and its year-end adjustments to record bad debts expense. (The company uses the perpetual inventory system and it applies the allowance method for its accounts receivable. Round amounts to the nearest dollar.)

Short answer

Answer

Thejournal entry for the years 2016 and 2017 in the books of Liang Company will be recorded as follows in steps 2 and 3.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Accounts Receivable

Account receivable is the amount of money that is receivable from the customer after being goods delivered, and this is the current assets of the business.

Journal entries for the year 2016

Date	Particulars	Debit($)	Credit($)
a	Accounts receivables	1,345,434
	Sales		1,345,434
	(To record the sales)
a-2	Cost of goods sold	975,000
	Merchandise inventory		975,000
	(To record the sale of goods)
b	Allowance for doubtful accounts	18,300
	Accounts receivables		18,300
	(To record the allowance)
c	Cash	669,200
	Accounts receivables		669,200
	(To record the cash collection)
d	Bad debt expense (Working Note 1)	28,169
	Allowance for doubtful accounts		28,169
	(To record the bad debt expense)

Journal entry for the year 2017

Date	Particulars	Debit($)	Credit($)
e	Accounts receivables	1,525,634
	Sales		1,525,634
	(To record the sales)
e-2	Cost of goods sold	1,250,000
	Merchandise inventory		1,250,000
	(To record the sale of goods)
f	Allowance for doubtful accounts	27,800
	Accounts receivables		27,800
	(To record the allowance)
g	Cash	1,204,600
	Accounts receivables		1,204,600
	(To record the cash collection)
h	Bad debt expense (Working Note 2)	13,899
	Allowance for doubtful accounts		13,899
	(To record the bad debt expense)

Working Note 1

$\left[\left[\left(\$1,345,434-\$18,300-\$669,200\right)\times \frac{1.5}{100}\right]+\$18,300\right]$

Working Note 2

$\left[\left[\left(\$657,934+\$1,525,634-\$27,800-\$1,204,600\right)\times \frac{1.5}{100}\right]-\left(\$28,169-\$27,800\right)\right]$