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Problem 7-4A Accounts receivable transactions and bad debts adjustments LO C1, P2, P3Liang Company began operations in Year 1. 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.Year 1Sold $1,351,000 of merchandise (that had cost $976,900) on credit, terms n/30.Wrote off $20,300 of uncollectible accounts receivable.Received $671,700 cash in payment of accounts receivable.In adjusting the accounts on December 31, the company estimated that 1.40% of accounts receivable would be uncollectible.Year 2Sold $1,525,600 of merchandise (that had cost $1,329,200) on credit, terms n/30.Wrote off $31,700 of uncollectible accounts receivable.Received $1,354,800 cash in payment of accounts receivable.In adjusting the accounts on December 31, the company estimated that 1.40% of accounts receivable would be uncollectible.Required:Prepare journal entries to record Liang’s Year 1 and Year 2 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 your intermediate calculations to the nearest dollar.)

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Answer:

Liang Company

General Journal:

Year 1

Debit Accounts Receivable $1,351,000

Credit Sales Revenue $1,351,000

To record sales on credit, terms n/30.

Debit Uncollectible Accounts Expenses $20,300

Credit Accounts Receivable $20,300

To write off uncollectibles.

Debit Cash Account $671,700

Credit Accounts Receivable $671,700

To record the receipt of cash on account.

Year 2:

Debit Accounts Receivable $1,525,600

Credit Sales Revenue $1,525,600

To record the sales of goods on credit, terms n/30.

Debit Uncollectible Expenses $31,700

Credit Accounts Receivable $31,700

To write off uncollectibles.

Debit Cash Account $1,354,800

Credit Accounts Receivable $1,354,800

To record the receipt of cash on account.

Adjusting Journal:

Year 1

Dec. 31

Debit Uncollectible Expenses $3,988.60

Credit Allowance for Uncollectible Accounts $3,988.60

To record the 1.4% estimated allowance for collectibles.

Year 2:

Dec. 31

Debit Allowance for Uncollectible Accounts $802.20

Credit Uncollectible Expense $802.20

To bring the balance of Allowance for Uncollectible Accounts to 1.4% accounts receivables

Explanation:

Dec. 31, Year 1:

i) Accounts Receivable Balance:

Sales = $976,900

Uncollectible $20,300

Cash receipts $671,700

Balance = $284,900

ii) Allowance for Uncollectible Accounts = $3,988.60 ($284,900 x 1.4%)

Year 2:

Dec. 31, Year 2:

i) Accounts Receivable Balance:

Beginning balance = $284,900

Sales = $1,329,200

Uncollectible $31,700

Cash receipts $1,354,800

Balance = $227,600

ii) Allowance for Uncollectible Accounts:

Beginning balance = $3,988.60

Reduction Difference = $802.20 ($3,186.40 - $3,988.60)

Year 2 Allowance = $3,186.40 (($227,600 x 1.4%)

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