The Lily Company uses the percent of receivables method of accounting for uncoll
ID: 2597420 • Letter: T
Question
The Lily Company uses the percent of receivables method of accounting for uncollectible accounts receivable., and a perpetual inventory system. As of January 1, its net accounts receivable totaled $192,000 (Accounts Receivable $200,000 less an $8,000 Allowance for Doubtful Accounts). During the current year, the following transactions occurred 1) Merchandise costing $1,050,000 was sold on account for $1,400,000. 2) The company collected $1,294,000 from customers on account. 3) $6,000 of accounts receivable were deemed uncollectible and written off. 4) $1,000 of accounts receivable previously written off as uncollectible were recovered At year-end, Lily Company estimates that 4% of its accounts receivable are uncollectible. Prepare journal entries to record these transactions. Answer:Explanation / Answer
Solution:
Lily Company
Journal entries
S.no
Account Name
Debit ($)
Credit ($)
1.
Accounts Receivable
1,400,000
Sales
1,400,000
Sold merchandise on account
Cost of goods sold
1,050,000
Merchandise
1,050,000
To record cost of merchandise sold
2.
Cash
1,294,000
Accounts Receivable
1,294,000
Collected from customer on account
3.
Bad debts expense
6,000
Accounts Receivable
6,000
Accounts receivable deemed uncollectible
Allowance for Doubtful accounts
6,000
Bad debts expense
6,000
Accounts receivable deemed uncollectible written off
4.
Accounts Receivable
1,000
Allowance for Doubtful accounts
1,000
Accounts receivable deemed uncollectible written off recovered
Cash
1,000
Accounts Receivable
1,000
Accounts receivable deemed uncollectible written off recovered
5.
Bad debts expense*
9,000
Allowance for Doubtful accounts
9,000
Accounts receivable deemed uncollectible
Working Notes:
Particulars
Accounts Receivable ($)
Allowance for doubtful accounts ($)
January 1
(Balances)
200,000
8,000
Transaction 1
Add: Sold merchandise on account
1,400,000
-
Transaction 2
Less: Collected from customer on account
(1,294,000)
-
Transaction 3
Less: Accounts receivable deemed uncollectible and written off
(6,000)
(6,000)
Transaction 4
Add: Accounts receivable deemed uncollectible written off recovered
Less: Amount received
1,000
(1,000)
1,000
Year End Balance
3,00,000
3,000
* Estimated Uncollectible accounts receivable at year end
= 4 % of yearend balance
= 4/100 X 3, 00,000
= $ 12,000
The balance in Allowance for Doubtful Accounts should be $ 12,000.As this is the estimated amount for uncollectible accounts receivable, a provision for allowance for doubtful debt is to be created. Since the current balance in Allowance for Doubtful Debt is $ 3,000, we need to increase the balance to $ 12,000. This can be done by crediting the account $9,000. The $9,000 is the amount of Bad Debt Expense that must be recorded.
S.no
Account Name
Debit ($)
Credit ($)
1.
Accounts Receivable
1,400,000
Sales
1,400,000
Sold merchandise on account
Cost of goods sold
1,050,000
Merchandise
1,050,000
To record cost of merchandise sold
2.
Cash
1,294,000
Accounts Receivable
1,294,000
Collected from customer on account
3.
Bad debts expense
6,000
Accounts Receivable
6,000
Accounts receivable deemed uncollectible
Allowance for Doubtful accounts
6,000
Bad debts expense
6,000
Accounts receivable deemed uncollectible written off
4.
Accounts Receivable
1,000
Allowance for Doubtful accounts
1,000
Accounts receivable deemed uncollectible written off recovered
Cash
1,000
Accounts Receivable
1,000
Accounts receivable deemed uncollectible written off recovered
5.
Bad debts expense*
9,000
Allowance for Doubtful accounts
9,000
Accounts receivable deemed uncollectible
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