Answer:
A.
1. Dr Accounts receivable $180,000
Cr Sales $180,000
2. Dr Cash $125,000
Cr Accounts receivable $125,000
3. Dr Sales returns and allowances $20,000
Cr Accounts receivable $20,000
4. Dr Allowance for doubtful accounts $35,000
Cr Accounts receivable $35,000
5. Dr Accounts receivable $2,500
Cr Allowance for doubtful accounts $2,500
Dr Cash $2,500
Cr Accounts receivable $2,500
B. Dr Bad debt expense $27,500
Cr Allowance for doubtful accounts $27,500
Explanation:
A1. To record the sale on account we will debit accounts receivable as our collectible to customer and credit sales in the amount of $180,000
A2. To record the collection, we will recognize the receipt of cash so we have to debit cash and credit accounts receivable to deduct the collectible balance in the amount of $125,000
A3. When the company receives returns from the customers, it will be charged to sales returns and allowances account so we have to debit it and credit accounts receivables in the amount of $20,000 to deduct collectibles to suppliers. Said, sales returns and allowances account is a contra account of sales. Thus, any amount recorded under it will be charged against (deduction) our sales.
A4. During the write off, we will debit allowance for doubtful accounts and credit accounts receivables to reduce its amount from the worthless receivables that is deemed to be uncollectible.
A5. Collection of previously written off receivables will resort to 2 entries. First, reversal of the original entry we made during the write off. So we debit Accounts receivable and credit allowance for doubtful accounts in the amount of $2,500. Next is to record the cash we received from the customer. So debit cash and credit accounts receivable in the same amount of $2,500.
B. To record the bad debt expense, we need to compute first the ending balance of the accounts receivable.
Beg $275,000 plus sales on account of $180,000 less collection $125,000, sales return of $20,000 and write off $35,000 = $275,000.
Bad debts is 10% of the Accounts receivable, so $275,000 x 10% = $27,500
Entry:
Dr bad debt expense $27,500
Cr allowance for doubtful accounts $27,500
