Answer:
The required journal entries are as follows:
Debit Accounts receivable $1,000,000
Credit Sales revenue $1,000,000
<em>(To record sales transactions on credit)</em>
Debit Cash $870,000
Credit Accounts receivable $870,000
<em>(To record collection of accounts receivable)</em>
Debit Allowance for doubtful accounts $42,000
Credit Accounts receivable $42,000
<em>(Write-off of accounts receivable)</em>
Debit Bad debt expense ($2,000 + $23,520) $25,520
Credit Allowance for doubtful accounts $25,520
<em>(Recognition of bad debt expense for the year)</em>
Explanation:
- The sales on credit is an addition to accounts receivable since everything was on credit. Collection during the year would definitely reduce the accounts receivable balance, same with the write-off. Therefore, the balance in accounts receivable will be: $500,000 + $1,000,000 - $870,000 - $42,000 = $588,000. 4% of $588,000 is $23,520.
- Allowance for doubtful accounts had an opening balance of $40,000. The write-off during the year would reduce this balance and throw it into a debit of $2,000. Therefore, balance in the allowance account before adjustment is $2,000 debit. To reinstate this to what the estimated bad debt expense should be, we have to add $2,000 to $23,520 to arrive at $25,520.