FOR review 2


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Problem 1

Shown below is summarized data for a company for the year end December 31.






Sales of merchandise for cash


Sales of merchandise on credit


Cost of goods sold


Selling expense


Administrative expenses


Sales returns and allowances


Items not included in the above amounts:

    Estimated bad debt loss, 2% of credit sales

    Average income tax rate, 20%

    Number of shares of common stock outstanding, 2,000


Based on the data, prepare an income statement that shows both gross profit and income from operations. Include the earnings per share. Calculate and interpret the meaning of the gross profit percentage ratio. Problem 2

In one year, a company had $30,000

Sales Revenue

on credit. At the start of the year, the Accounts Receivable showed a $6,000 debit balance and the Allowance for Doubtful Accounts showed a $400 credit balance. Collections of accounts receivable during the year amounted to $22,000. The following gives additional items during the year.



On December 31, an Account Receivable of $450 from a prior year was determined to be uncollectable; therefore, it was written off immediately as a bad debt.


On December 31, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 3 percent of credit sales for the year.


Give the journal entries for the items (a) and (b) at the end of the accounting period. Show how the amounts related to Accounts Receivable and

Bad Debt Expense

would be reported on the income statement and balance sheet for the year. Disregard income tax considerations.

Problem 3

A company sold $18,000 of goods on credit on May 1. At the time of the sale, the company recorded a debit to Accounts Receivable and a credit to Sales Revenue for $18,000. Terms were 2/10, n/30. Complete the journal entries the company would record for each of the following independent situations: 

(a)    The balance due was paid, less the discount, on May 10.

(b)   The balance due was paid on May 30.


Half of the goods were returned for credit on May 4. The balance due was paid, less the discount, on May 10.

Problem 4

The following data were selected from the records of a company for the year ended December 31.


In the following order, except for cash sales, the company sold merchandise and made collections on credit terms 2/10, n/30, assuming a unit sales price of $500 in all transactions and use the gross method to record sales revenue.


(a)    Sold merchandise for cash, $220,000.

(b)   Sold merchandise to Company A, invoice price, $10,000

(c)    Sold merchandise to Company B , invoice price, $25,000

Company A paid the invoice in (b) within the discount period

Sold merchandise to Company C, invoice price, $30,000

Two days after paying the account in full, Company A returned one defective unit and received a cash refund

Collected $78,400 cash from customer sales on credit in prior year, all within the discount periods

Three days after purchased date, Company B returned three of the units purchased in (c) and received account credit

Company B paid its account in full within the discount period

Sold merchandise to Company D, invoice price $12,000

Company C paid its account in full after the discount period

Wrote off an account from a previous years account of $2,000 after deciding that the amount would never be collected

The estimated bad debt rate used by the company was 3 percent of credit sales net of returns


Using the categories shown below, indicate the effect of each listed transaction, including the write-off of the uncollectible account and the adjusting entry for estimated bad debts, ignoring the cost of goods sold. Indicate the sign and amount of the effect or the use of “NE” to indicate “no effect.” Use the following table as a guide.


Sales Revenue

Bad Debt Expense


Sales Discounts (taken)

Sales Returns and Allowances


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