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16 September, 15:14

As of December 31, 2016, Nala Incorporated reported accounts receivable for $275,000 less allowance for doubtful accounts of $27,000 on their balance sheet. During 2017, Nala Incorporated had the following transactions related to their receivables balance:

(1) Sales on account $180,000

(2) Collections of accounts receivable 125,000

(3) Sales returns 20,000

(4) Write-offs of accounts receivable deemed uncollectible 35,000

(5) Recovery of bad debts previously written off 2,500

(a) Prepare the journal entries for each of these five transactions

(b) Prepare the journal entry to record bad debt expense for 2017, assuming that the aging of accounts receivable indicates that estimated bad debts are 10% of accounts receivable.

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  1. 16 September, 15:52
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    a. 1. Debit Accounts receivable $180,000

    Credit Sales $180,000

    2. Debit cash $125,000

    Credit Accounts receivable $125,000

    3. Debit Sales return $20,000

    Credit $20,000

    4. Debit Provision for bad debts expense $35,000

    Credit Accounts receivable $35,000

    5. Debit Accounts receivable $ $2,500

    Credit Provision for bad debts expense $2,500

    Debit Cash $2,500

    Credit Accounts receivable $2,500

    B. Debit Bad debts expense $27,500

    Credit provision for bad debt expense $27,500

    Explanation:

    1. Sale on account will increase the accounts receivable. So we have to debit accounts receivable and credit to sales in the amount of $180,000

    2. Collections will decrease the accounts receivable due payments made by the customer. So we have to debit cash and credit accounts receivable by $125,000

    3. Sales return is a contra asset account that will decrease the accounts receivable and also the net sales. So we will debit sales return and credit accounts receivable in the amount of $20,000

    4. Write offs will decrease the provision for bad debts account as well as the accounts receivable accounts by $35,000

    5. Recovery of bad debts previously written off has no effect in accounts receivable but will increase the provision for bad debts due to reversal of entry previously made. First, we will reverse the original written off entry. Debit Accounts receivable and credit provision for bad debts expense in the amount of $2,500. Then we will record the collection by debiting cash and crediting accounts receivable in the amount of $2,500

    B. Let's determine the balance of accounts receivable first,

    Beg. $275,000 + 180,000 sale on account - 125,000 collection - 20,000 sales return - 35,000 write-off = $275,000

    Therefore, $275,000 x 10% = $27,500

    Entry:

    Debit Bad debts expense $27,500

    Credit provision for bad debts expense $27,500
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