Answer:
Liang Company
Journal entries to record Liang’s 2017 and 2018 summarized transactions and its year-end adjustments to record bad debts expense (using the perpetual inventory system and applying allowance method for accounts receivable)
1. 2017 Journal entries:
Debit Accounts Receivable with $1,351,700
Credit Sales Account with $1,351,700
To record sales on credit, terms n/30.
Debit Cost of Goods Sold with $981,800
Credit Inventory Account with $981,800
To record cost of goods sold.
Debit Uncollectible Expense Account with $2,150
Credit Accounts Receivable with $2,150
To write off uncollectible accounts receivable.
Debit Cash with $670,400
Credit Accounts Receivable with $670,400
To record cash received on account.
December 31:
Debit Uncollectible Expense Account with $20,374.50
Credit Allowance for Uncollectible Account with $20,374.50
To record 3% allowance for accounts receivable balance.
2. 2018 Journal entries:
Debit Accounts Receivable with $1,586,800
Credit Sales Account with $1,586,800
To record sales on credit, terms n/30.
Debit Cost of Goods Sold with $1,326,300
Credit Inventory Account with $1,326,300
To record cost of goods sold.
Debit Allowance for Uncollectible Account with $25,300
Credit Accounts Receivable with $25,300
To write off uncollectible accounts receivable.
Debit Cash with $1,182,900
Credit Accounts Receivable with $1,182,900
To record cash received on account.
December 31:
Debit Uncollectible Expense Account with $36,658
Credit Allowance for Uncollectible Account with $36,658
To bring the allowance for accounts receivable balance to 3%.
Explanation:
1. Using the perpetual inventory system where transactions are recorded to inventory immediately and not at period-end, the sales transactions will reduce the balance of the inventory account with the cost of sales and increase the cost of sales with the same amount. The Sales account is increased by sales value while the Accounts Receivable is also increased with the same amount.
2. The write-off is initially charged to the uncollectible expense account directly in 2017 but subsequently, it will be debited to the Allowance of Uncollectible account, applying the allowance method.
3. The perpetual inventory system, inventory transactions are recognized in the inventory and cost of goods sold accounts immediately and not at period-end like the periodic inventory system, which waits until inventory count to recognize transactions.
