Answer:
The required journals are:
Debit Cash ($170,000 - $85,000) $85,000
Debit Accounts receivable $85,000
Credit Sales revenue $170,000
<em>(To record sales transactions during the year)</em>
Debit Cash $68,000
Credit Accounts receivable $68,000
<em>(To record collections on account)</em>
Debit Allowance for doubtful accounts $1,500
Credit Accounts receivable $1,500
<em>(To write-off uncollectible accounts receivable)</em>
Debit Bad debt expense $2,600
Credit Allowance for doubtful accounts $2,600
<em>(To record the bad debt expense for the year)</em>
- Bad debt expense to be reported in the income statement is $2,600 while $25,500 will be the balance in accounts receivable (balance sheet).
- 2% does not appear reasonable as proven by the write-off that happened during the year with insufficient buffer in the allowance for doubtful accounts and also considering the volume of transactions and collectibility.
Explanation:
- The credit sales transactions will be an addition to accounts receivable while the collections during the year will reduce the accounts receivable though it is increasing cash balance. The write-off will also reduce the accounts receivable. So the balance in accounts receivable will be: $$10,000 + $85,000 - $68,000 - $1,500 = $25,500.
- Allowance for doubtful accounts had an opening balance of $600. The write-off of $1,500 will throw it into a debit balance of $900 before the adjustments. 2% of credit sales ($85,000) is $1,700. The debit balance of $900 will be added to the $1,700 to arrive at $2,600.
- The 2% does not appear reasonable based on the above (Answer section).