P6-1 Reporting Net Sales and Expenses with Discounts, Returns, and Bad Debts (AP6-1)

LO6-1, 6-2

The following data were selected from the records of Sykes Company for the year ended December 31, current year.

Balances January 1, current year

Accounts receivable (various customers)

$120,000

Allowance for doubtful accounts

8,000

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

Transactions during 2014

Sold merchandise for cash, $235,000.

Sold merchandise to R. Smith; invoice price, $11,500.

Sold merchandise to K. Miller; invoice price, $26,500.

Two days after purchase date, R. Smith returned one of the units purchased in (b) and received account credit.

Sold merchandise to B. Sears; invoice price, $24,000.

R. Smith paid his account in full within the discount period.

Collected $98,000 cash from customer sales on credit in prior year, all within the discount periods.

K. Miller paid the invoice in (c) within the discount period.

Sold merchandise to R. Roy; invoice price, $19,000.

Three days after paying the account in full, K. Miller returned seven defective units and received a cash refund.

After the discount period, collected $6,000 cash on an account receivable on sales in a prior year.

Wrote off a prior year account of $3,000 after deciding that the amount would never be collected.

The estimated bad debt rate used by the company was 1.5 percent of credit sales net of returns.

Required:

Using the following categories, indicate the effect of each listed transaction, including the write-off of the uncollectible account and the adjusting entry for estimated bad debts (ignore cost of goods sold). Indicate the sign and amount of the effect or use NE for no effect. The first transaction is used as an example.

(a)

Sales Revenue

Sales Discounts (taken)

Sales Returns and Allowances

Bad Debt Expense

+235,000

NE

NE

NE

Show how the accounts related to the preceding sale and collection activities should be reported on the 2014 income statement. (Treat sales discounts as a contra-revenue.)