Question 3

The controller for Lexington Corporation is concerned about certain business transactions that the company experienced during 2011. The controller, after discussing these matters with various individuals, has come to you for advice. The transactions at issue are presented below.

1. The company has decided to switch from the direct write-off method in accounting for bad debt expense to the percentage-of-sales approach. Assume that Lexington Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way:

2010 2011

From 2010 sales 31,800 12,000

From 2011 sales 45,000

The controller estimates that an additional $65,400 will be charged off in 2012: $11,400 applicable to 2010 sales and $54,000 to 2011 sales.

2. Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such on account. At December 31, 2011, inventory billed and in the hands of consignees amounted to $400,000. The percentage markup on selling price is 20%. Assume that consigned inventory is sold the following year. The company uses the perpetual inventory system.

Instructions

(a) Assume that Lexington Corporation reported net income of $1,000,000 for 2011. Present a schedule showing the corrected net income after reviewing the above transactions.

(b) Prepare the journal entries necessary at December 31, 2011, assuming that the books have been closed.