CHAPTER 7
SALES AND COLLECTION CYCLE
Timing of Revenue Recognition
Revenue Recognition: Some Examples (pp. 258-9)
Using the example in the text, if the Atlanta Braves collected $450,000 in advance ticket sales in March
of 2001 and 10% of the games the tickets were sold for were played in April, the journal entries to record
the transactions would be as follows:
Date
3/2001
Transaction
Debit
Cash
Unearned ticket revenue
Credit
$450,000
$450,000
To record collection for advance ticket sales
4/2001
Unearned revenue
Ticket revenue earned .
$45,000
$45,000
To recognize revenue earned from advance ticket sales
The FSU ticket office has sold $100,000 worth of tickets for
the upcoming football season. There are six home games.
Prepare the journal entry to record the sale, assuming the
tickets were sold several months before the football season
starts. Prepare the journal entries to record the revenue
recognition in September (half the games were played) and
October (one-third of the games were played).
STUDY BREAK 7-1 (p. 259)
SEE HOW YOU’RE DOING
Sales Discounts (pp. 259-60)
Suppose you sold $1,000 worth of merchandise to a customer with the terms 2/10, n/30, and the customer
paid within the discount period. The journal entries are as follows:
Date
Transaction
Debit
Accounts receivable
Sales
Credit
$1,000
$1,000
To record the sale of inventory, terms 2/10, n/30
39
Date
Transaction
Debit
Cash
Sales discounts
Accounts receivable
$980
20
Credit
$1,000
To record accounts receivable collections
In March, Good Buy Company sold merchandise for $3,500
with the terms 3/10, n/30. Customers always take advantage
of cash discount offers. Prepare the journal entries to record
Good Buy Company's March sales and accounts receivable
collections.
STUDY BREAK 7-2 (p. 260)
SEE HOW YOU’RE DOING
Sales Returns (pp. 260-61)
If $10,000 worth of merchandise was sold and $2,000 was returned, the entries would be as follows:
Date
Transaction
Debit
Cash or Accounts receivable
Sales
Credit
$10,000
$10,000
To record merchandise sales
Sales returns
Cash or Accounts receivable
$2,000
$2,000
To record the return of merchandise
Accounting for Cash (pp. 261 - 64)
When doing a bank reconciliation, every adjustment to the balance per books requires a journal entry to
update the cash account, as well as adjust other accounts as needed. Based upon the Low Company
example, the following journal entries are required:
Date
5/31/2002
Transaction
Debit
Cash
Credit
$1,030
Notes receivable
Interest revenue
$1,000
30
To record collection of a notes receivable by the bank (assuming $1,000 principal and $30 interest)
40
Date
5/31/2001
Transaction
Debit
Operating expense
Accounts receivable
Accounts payable
Cash
$
Credit
10
100
18
$128
To record bank service charges and necessary account balance corrections
ABC Company’s unadjusted book balance for cash
amounted to $2,400.
The company’s bank statement
included a debit memo for bank service charges of $100.
There were two credit memos. One was for $300, which
represented a collection that the bank made for ABC. The
second credit memo was for $100, which represented the
amount of interest that ABC had earned on its bank accounts
during the period. Outstanding checks amounted to $250
and there were no deposits in transit. Prepare the journal
entries that would be required to adjust ABC Company's
cash account.
STUDY BREAK 7-3 (p. 264)
SEE HOW YOU’RE DOING
Accounts Receivable: Collecting Payment for Sales Made on Account
Direct Write-Off Method (pp. 264-5)
If you use the direct write-off method, no bad debt expense is recorded until a specific debt is
determined to be uncollectible. For example, if you determine that a $150 account is uncollectible, the
journal entry is as follows:
Date
Transaction
Debit
Bad debt expense
Accounts receivable
$150
Credit
$150
To record the write-off of an uncollectible account.
Gloria’s Glassware uses the direct write-off method to
account for bad debts. In 2005, Gloria sold $20,000 on
account. She estimated that between $100 and $150 would
eventually go uncollected.
No specific accounts were
identified as uncollectible during 2005. In 2006, a credit
customer who owed Gloria $35 filed for bankruptcy. Gloria
wants to remove that customer’s account from her
outstanding Accounts receivable. Prepare the journal entries
to account for Gloria’s bad debt expense that are required in
2005 and 2006.
41
STUDY BREAK 7-4 (p. 265)
SEE HOW YOU’RE DOING
Allowance Method (pp. 265-69)
Sales. Under the sales method, the bad debt expense estimate is based upon a percentage of sales. If
sales for the year total $100,000 and you estimate that 5% are uncollectible, the journal entry is:
Date
Transaction
Debit
Bad debt expense
Allowance for uncollectible accounts
Credit
$5,000
$5,000
To record the estimate for bad debts based on the sales method
When using the allowance method and an actual $150 account is determined to be uncollectible, the
journal entry reduces the Allowance account and Accounts receivable. No bad debt expense is recorded
at the time of an actual writeoff.
Date
Transaction
Debit
Allowance for uncollectible accounts
Accounts receivable
Credit
$150
$150
To record the write-off of an uncollectible account
Accounts Receivable. Following the Good Guys Company example in the text, the journal entries
relating to bad debt expense and the allowance for doubtful accounts for the first two years are as follows:
Date
12/31/2003
Transaction
Debit
Bad debt expense
Allowance for uncollectible accounts
Credit
$2,078
$2,078
To record the estimate for bad debts based on the accounts receivable aging method
Date
Transaction
Debit
Allowance for uncollectible accounts
Accounts receivable (Dibbs)
Credit
$600
$600
To record the write-off of M. Dibb’s account
1/1 – 12/31 2004
Allowance for uncollectible accounts
Accounts receivable (various)
$1,400
$1,400
To record the write-off of other uncollectible accounts.
12/31/2004
Bad debt expense
Allowance for uncollectible accounts
$2,422
To record the estimate for bad debts based on the accounts receivable aging method
($2,500 estimated uncollectible amount - $78 overestimated amount from 2003)
42
$2,422
Suppose at the end of the year, Pendleton Corp. records
showed the following:
Allowance for uncollectible accounts
(excess from prior year)
a
Bad debt expense
Accounts receivable
STUDY BREAK 7-5 (p. 269)
SEE HOW YOU’RE DOING
0
100
0
10,000
a
Bad debt expense has a zero balance because no adjustments have
been made.
Pendleton estimated the end-of-year uncollectible accounts
receivable to be $500, based on an aging schedule of current
accounts receivable. Prepare the journal entry to record bad
debt expense for the year.
Credit Card Sales (pp. 269 - 70)
If Wally Tire Company makes $1,000 of MasterCard sales and the MasterCard fee is 5%, the journal
entry to record the day’s sales is as follows:
Date
Transaction
Debit
Accounts receivable (MasterCard)
Credit card expense
Sales revenue
Credit
$ 950
50
$1,000
To record the day’s credit card sales
During December, Magic Cow Company made a $5,000
MasterCard sale to a customer. MasterCard charges Magic
Cow a fee of 3% of sales for its services. Prepare the journal
entry to record this transaction.
STUDY BREAK 7-6 (p. 270)
SEE HOW YOU’RE DOING
Warranties (pp. 270 - 1)
If Brooke’s Bike Company sold 100 bikes in the month of June with a 1-year warranty and the accountant
estimated that each bike will require $30 worth of warranty repairs, the journal entry to record the
warranty expense and related liability is as follows:
43
Date
6/30
Transaction
Debit
Warranty expense
Estimated warranty liability
Credit
$3,000
$3,000
To record the estimated warranty expense/liability for June sales
In July, Brooke’s didn’t make any sales, but they did incur $250 of repair costs related to June sales. The
journal entry to record the repair costs is as follows:
Date
7/1 – 7/31
Transaction
Debit
Estimated warranty liability
Cash
$250
Credit
$250
To record the warranty repairs made in July
August was another slow month for bicycle sales (none were
made), but Brooke’s Bike Company did some warranty
repairs on previous sales. The total spent was $500. Prepare
the journal entry to record the repairs.
STUDY BREAK 7-7 (p. 271)
SEE HOW YOU’RE DOING
Summary Problem: Tom's Wear Increases Sales in June
Transaction 1
Pays cash of $2,400 for 2 months of rent on the warehouse beginning June 15th.
Date
Transaction
Debit
Credit
6/1/2001
Prepaid rent
$2,400
Cash
$2,400
To record the prepayment of 2 month’s rent
Transaction 2
Pays Sam Cubby's salary for May; gross pay $1,000; also makes the payroll tax deposit,
including the employer's matching payroll taxes.
Date
Transaction
Debit
Credit
6/5/2001
Salaries payable
$723
Payroll taxes withheld
277
Other payables
77
Cash
$1,077
To record payment of salary and taxes
Transaction 3
Delivers the second half of the shirts to the school system - 450 shirts - and recognizes
revenue of $4,950.
44
Date
6/10/2001
Transaction
Unearned revenue
Revenue
To record delivery of the second half of the shirts to the school
6/10/2001
Cost of goods sold
Inventory
To record cost of goods sold
Debit
$4,950
Credit
$4,950
$1,865
$1,865
Transaction 4
Pays accounts payable of $4,200.
Date
Transaction
6/12/2001 Accounts payable
Cash
To record payment on account
Debit
$4,200
Credit
$4,200
Transaction 5
Signs a contract with the school system to deliver 500 shirts per month for September
through December, at a price of $10 per shirt. No journal entry is required.
Transaction 6
Purchases 5,000 T-shirts @$3.79 each; shipping terms- FOB shipping point and shipping
costs of $50. Tom's Wear pays cash for the shipping, but makes the purchase on account
Date
Transaction
Debit
Credit
6/20/2001
Inventory
$19,000
Cash
$
50
Accounts payable
18,950
To record the purchase of 5,000 T-shirts, FOB shipping
point at $3.79 each + $50 shipping cost
Transaction 7
Sells 4,000 shirts to various stores for $11 each. All sales are on account
Date
Transaction
Debit
6/20/2001
Revenue
$44,000
Accounts receivable
To record the sale of 4,000 T-shirts on account
6/20/2001
Cost of goods sold
Inventory
To record cost of goods sold
Credit
$44,000
$15,470
$15,470
Transaction 8
Collects $8,800 in accounts receivable.
45
Date
6/21/2001
Transaction
Debit
$8,800
Cash
Accounts receivable
To record the collection accounts receivable
Credit
$8,800
Transaction 9
Miscellaneous operating expenses for the month are $600.
Date
Transaction
6/30/2001
Other operating expenses
Cash
To record the payment of misc. operating expenses
Debit
$600
Transaction 10
Tom's Wear pays a dividend of $1,000.
Date
Transaction
6/30/2001
Retained earnings
Cash
To record the payment of a cash dividend
Debit
$1,000
Credit
$600
Credit
$1,000
Adjustment 1
Record depreciation expense for June - $100 for the computer and $1,160 for the van (8,000
miles x $0.145).
Date
Transaction
Debit
Credit
6/30/2001
Depreciation expense
$1,260
Accum. dep. - Computer
$100
Accum. dep. - Van
1,160
To record June depreciation expense
Adjustment 2
Record interest expense on the van note.
Date
Transaction
6/30/2001
Interest expense
Interest payable
To record interest expense for June
Debit
$250
Adjustment 3
Record insurance expense of $100 for the month of June.
Date
Transaction
6/30/2001
Insurance expense
Prepaid insurance
To record insurance expense for June
Debit
$100
Credit
$250
46
Credit
$100
Adjustment 4
Record rent expense of $1,200 for the month of June.
Date
Transaction
6/30/2001
Rent expense
Prepaid rent
To record rent expense for June
Adjustment 5
Record Web costs of $50 for June.
Date
Transaction
6/30/2001
Other operating expenses
Prepaid Web service
To record web maintenance services for June
Debit
$1,200
Credit
$1,200
Debit
Credit
$50
$50
Adjustment 6
Accrue Sam Cubbie's salary for June, including the employer portion of payroll taxes.
Date
Transaction
Debit
Credit
6/30/2001
Salary expense
$1,000
Employer's payroll tax expense
77
Payroll taxes withheld
$277
Other payables
77
Salaries payable
723
To record the accrual of Sam Cubbie's salary, withholding and payroll taxes
Adjustment 7
Bad debt estimate = 3% of credit sales.
Date
Transaction
6/30/2001
Bad debt expense
Allowance for bad debts
To record the bad debt estimate for June
Debit
$1,320
Adjustment 8
Warranty liability estimate = 2% of total sales.
Date
Transaction
6/30/2001
Warranty expense
Warranties payable
To record the estimated warranty liability for June
Debit
$979
Credit
$1,320
Credit
$979
47
T-accounts for Tom's Wear with June journal entries and adjustments
Cash
BB $8,805 $2,400 1
8
8,800
Accounts
receivable
BB $8,900 $8,800 8
1,077 2
4,200 4
7 44,000
50 6
600 9
44,100
Allowance for bad
debts
$1,320 Adj-7 BB
0
0
6
Inventory
$4,700
$1,865 3
19,000
BB
Prepaid insurance
$250 $100 Adj-3
15,470 7
150
1,320
6,365
1,000 10
$8,278
BB
Prepaid Web
service
$250
$50 Adj-5
BB
1
Prepaid rent
$600 $1,200 Adj-4 BB
Equipment Computer
$4,000
Acc dep - Computer
$300 BB
100 Adj-1
2,400
Equipment - Van
BB $30,000
4,000
200
30,000
1,800
Acc dep - Van
$1,595 BB
1,160 Adj-1
400
Accounts payable
4 $4,200 $4,200 BB
18,950 6
Interest payable
$500 BB
250 Adj-2
3
Unearned revenue
$4,950
$4,950 BB
2
Payroll taxes
withheld
277 $277 Adj-6
277
0
2,755
2
Other payables
77
$77 BB
77 Adj-6
18,950
2
Salaries payable
723 $723 BB
750
Warranties payable
$979 Adj-8
Notes payable
$30,000 BB
Common stock
$5,000 BB
723 Adj-6
979
77
277
723
48
30,000
5,000
Retained earnings
10 $1,000 $9,883 BB
Revenue
$4,950 3
44,000 7
3
7
Cost of goods sold
$1,865
15,470
Adj-1
8,883
Adj-3
Insurance
expense
$100
100
1,320
Adj-8
Employer's payroll
tax expense
$77
77
17,335
Adj-4
Rent expense
$1,200
1,200
650
Bad debt expense
Adj-7 $1,320
Adj-6
1,260
48,950
Other operating
expenses
$600
9
Adj-5
50
Depreciation
expense
$1,260
Warranty expense
$979
979
49
Adj-2
Interest expense
$250
250
Adj-6
Salary expense
$1,000
1,000
Tom's Wear, Inc.
Adjusted Trial Balance
June 30, 2001
Debits
$8,278
44,100
Cash
Accounts receivable
Allowance for bad debts
Inventory
Prepaid insurance
Prepaid Web service
Prepaid rent
Equipment - Computer
Accumulated depreciation - Computer
Equipment - Van
Accumulated depreciation - Van
Accounts payable
Interest payable
Payroll taxes withheld
Other payables
Salaries payable
Warranties payable
Notes payable
Common stock
Retained earnings
Revenue
Cost of goods sold
Depreciation expense
Employer's payroll tax expense
Other operating expense
Insurance expense
Rent expense
Interest expense
Salary expense
Bad debt expense
Warranty expense
Totals
Credits
$1,320
6,365
150
200
1,800
4,000
400
30,000
2,755
18,950
750
277
77
723
979
30,000
5,000
8,883
48,950
17,335
1,260
77
650
100
1,200
250
1,000
1,320
979
$119,064
50
$119,064
Journal Entries for Study Break Questions
Date
Transaction
Debit
$100,000
Cash
Unearned ticket revenue
Credit
Study Break 7-1
$100,000
To record collection of advance ticket sales
9/1 - 9/30
Unearned revenue
Ticket revenue earned
$50,000
$50,000
To recognize revenue earned from advance ticket sales
10/1 10/31
Unearned revenue
Ticket revenue earned
$33,333
$33,333
To recognize revenue earned from advance ticket sales
Date
3/1 - 3/31
Transaction
Accounts receivable
Sales
Debit
$3,500
Credit
Study Break 7- 2
$3,500
To record the sale of inventory, terms 3/10, n/30
Cash
Sales discounts
Accounts receivable
$3,395
105
$3,500
To record accounts receivable collections
Date
Transaction
Debit
$300
100
Cash
Miscellaneous operating expenses
Accounts receivable
Interest revenue
Credit
Study Break 7- 3
$300
100
To record bank statement adjustments
Date
2005
2006
Transaction
No journal entries required
Debit
Bad debt expense
Accounts receivable
Credit
$35
$35
To record the write-off an uncollectible account
51
Study Break 7- 4
Date
12/31
Transaction
Bad debt expense
Debit
$400
Allowance for uncollectible
accounts
Credit
Study Break 7- 5
$400
To record bad debt expense
Date
Dec.
Transaction
Accounts receivable (MasterCard)
Credit card expense
Sales revenue
Debit
$4,850
150
Credit
Study Break 7- 6
$5,000
To record bad debt expense
Date
8/1 - 8/31
Transaction
Estimated warranty liability
Cash
Debit
$500
Credit
Study Break 7- 7
$500
To record August warranty repairs
Short Exercises
SE7-41Datatech's accountant wrote a check to a supplier for $1,050, but erroneously recorded it on the
company's books as $1,500. She discovered this when she saw the monthly bank statement and noticed
that the check had cleared the bank for $1,050. Give the journal entry Datatech needs to make to its
accounting records to correct this error.
Date
Account
Debit
Credit
SE7-8 On January 1, 2002, a company's accounts receivable balance was $8,900 and the allowance for
doubtful accounts balance was $600. This information came from the December 31, 2001 balance sheet.
During 2002, the company reported $77,000 of credit sales; $400 of specific receivables were written off
as uncollectible during 2002. Cash collections of receivables were $69,000 for the year. The company
estimates that 3% of the year-end accounts receivable will be uncollectible. Use T-accounts to analyze the
problem, and then make the journal entry to record the bad debt expense for the year ended December 31,
2002.
52
Accounts receivable
$8,900
Date
Allowance for
uncollectible accounts
$600 1/1
Account
Bad debt expense
Debit
Credit
SE7-11 The 2001 year-end unadjusted trial balance shows: Accounts receivable (AR) $50,000 debit;
Allowance for uncollectibles $1,000 credit; and Net sales $200,000. Using the "percent of sales" method,
the company estimates 2% of sales will become uncollectible. Give the journal entry to record the bad
debt expense for 2001.
Date
Account
Debit
Credit
SE7-13 Selby Company accepts MasterCard from its customers. MasterCard charges Selby Company
4% of sales for its services. During 2004, Selby's customers used MasterCard for $43,560 worth of
purchases. Record the journal entry for these sales.
Date
Account
Debit
Credit
SE7-16 When Handle's Pet Shop sells a puppy, it provides a health warranty for the little critter. If a
puppy should become ill in the first two years after the sale, Handle's Pet Shop will pay the vet bill up to
$200. Because this is normally a significant expense for the shop, the accountant insists that Handle's Pet
Shop record an estimated warranty liability at the end of every year before the financial statements are
prepared. On December 31, 2004, the accountant made the appropriate entry to record that liability. On
March 30, 2005, the store received a $50 vet bill from one of its customers, who had bought a puppy in
2004. Handle's Pet Shop wrote a check for $50 to reimburse the puppy's owner. Give the journal entry
for this payment.
53
Date
Account
Debit
Credit
Exercises
E7-6 Compute Right uses the allowance method to account for bad debts. Show the journal entry for
each item below.
a. A customer pays his bill of $50.
b. 1% of $500,000 in sales is estimated to be uncollectible.
c. 5% of $100,000 in accounts receivable is estimated to be uncollectible. Last year, an excess of
$400 beyond what was expected was written off.
d. A specific account receivable in the amount of $65 is reinstated.
Transaction
Account
Debit
Credit
a.
b.
c.
d.
E7-10 Western Wear Corporation began 2003 with accounts receivable of $1,240,000 and a balance in
the allowance for uncollectible accounts of $36,000. During 2003, credit sales totaled $5,190,000 and
cash collected from customers totaled $5,380,000. Also, actual write-offs of specific accounts receivable
in 2003 were $33,000. At end of the year, an accounts receivable aging schedule indicated a required
allowance of $32,300. No accounts receivable previously written off were collected. Use T-accounts to
show what happened in each of the accounts shown below. Then, give the journal entry to record the bad
debt expense for the year ended December 31, 2003.
54
Allowance for
uncollectible accounts
1/1 $36,000
Accounts receivable
1/1 $1,240,000
Date
Account
Bad debt expense
Debit
Credit
E7-13 Trane Air Company accepts cash or credit card payment from customers. During July, Trane sold
$100,000 worth of merchandise to customers who used VISA to pay for their purchases. VISA charges
Trane 4% of sales for their services. Give the journal entry to record this transaction in Trane's financial
records.
Date
Account
Debit
Credit
Problems – Set A
P7-3A Given the following errors:
a. The bank recorded a deposit of $200 as $2,000.
b. The company's bookkeeper mistakenly recorded a deposit of $530 as $350.
c. The company's bookkeeper mistakenly recorded a payment of $250 received from a customer
as $25 on the bank deposit slip. The bank caught the error and made the deposit for the correct
amount.
d. The bank statement shows that check that was written by the company for $255 was
erroneously paid (cleared the account) as $225. This was the bank's error.
e. The bookkeeper wrote a check for $369 but erroneously wrote down $396 as the cash
disbursement in the company's records.
Required:
Determine which of the errors would require the company to record a journal entry. Then, record the
journal entry.
55
Transaction
Account
Debit
Credit
P7-4A Consider the following:
a. At year-end, Vio Company has accounts receivable of $14,000. The allowance for uncollectible
accounts has a credit balance prior to adjustment of $300. (Last year, uncollectible accounts were
overestimated by $300.) An aging schedule prepared on December 31 indicates that $1,100 of
Vio's accounts receivable are uncollectible accounts.
b. At year-end, Demato Company has accounts receivable of $25,700. The allowance for
uncollectible accounts has a debit balance prior to adjustment of $400. (Last year, uncollectible
accounts were underestimated by $400.) An aging schedule prepared on December 31 indicates
that $2,300 of Demato's accounts receivable are uncollectible accounts.
Required: For each situation described above, give the journal entry to record bad debt expense. In both
cases, the company uses the accounts receivable balance as the basis for estimating bad debts.
Transaction
Account
Debit
a.
b.
56
Credit
P7-5A Consider the following situations:
a. At year-end, Nash Company has accounts receivable of $84,000. The allowance for uncollectible
accounts has a credit balance prior to adjustment of $300. (Last year, uncollectible accounts were
overestimated by $300.) Net credit sales for the year were $250,000 and 3% is estimated to be
uncollectible.
b. At year-end, Bridges Company has accounts receivable of $83,000. The allowance for
uncollectible accounts has a debit balance prior to adjustment of $400. (Last year, uncollectible
accounts were underestimated by $400.) Net credit sales for the year were $250,000 and 3% is
estimated to be uncollectible.
Required: For each situation described above, give the journal entry to record bad debt expense. In both
cases, the company uses net credit sales as the basis for estimating bad debts.
Transaction
Account
Debit
a.
b.
57
Credit