Clayco Company completes the following selected transactions during year 2011.
July 14 Writes off a $750 account receivable arising from a sale to Briggs Company that dates to 10 months ago. (Clayco Company uses the allowance method.)
30 Clayco Company receives a $1,000, 90-day, 10% note in exchange for merchandise sold to Sumrell Company (the merchandise cost $600).
Aug. 15 Receives $2,000 cash plus a $10,000 note from JT Co. in exchange for merchandise that sells for $12,000 (its cost is $8,000). The note is dated August 15, bears 12% interest, and matures in 120 days.
Nov. 1 Completed a $200 credit card sale with a 4% fee (the cost of sales is $150). The cash is received immediately from the credit card company.
3 Sumrell Company refuses to pay the note that was due to Clayco Company on October 28. Prepare the journal entry to charge the dishonored note plus accrued interest to Sumrell Company's accounts receivable.
5 Completed a $500 credit card sale with a 5% fee (the cost of sales is $300). The payment from the credit card company is received on Nov. 9.
15 Received the full amount of $750 from Briggs Company that was previously written off on
July 14. Record the bad debts recovery.
Dec. 13 Received payment of principal plus interest from JT for the August 15 note.
Required
1. Prepare journal entries to record these transactions on Clayco Company's books.
2. Prepare an adjusting journal entry as of December 31, 2011, assuming the following:
a. Bad debts are estimated to be $20,400 by aging accounts receivable. The unadjusted balance of the Allowance for Doubtful Accounts is $1,000 debit.
b. Alternatively, assume that bad debts are estimated using the percent of sales method. The Allowance for Doubtful Accounts had a $1,000 debit balance before adjustment, and the company estimates bad debts to be 1% of its credit sales of $2,000,000.