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 Giant Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way:
The controller estimates that an additional $163,500 will be charged off in 2011: $28,500 applicable to 2009 sales and $135,000 to 2010 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, 2010, inventory billed and in the hands of consignees amounted to $1,000,000. The percentage markup on selling price is 20%. Assume that consigned inventory is sold the following year. The company uses the perpetual inventory system.
3) During the current year, the company sold $1,500,000 of goods on the installment basis. The cost of sales associated with these goods sold is $1,050,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $430,000, including a down payment of $150,000, was collected on these installment sales during the current year. Due to questionable collectibility, the installment method was considered appropriate.
Instruction:
(a) Assume that Giant Corporation reported net income of $2,500,000 for 2010. Present a schedule showing the corrected net income after reviewing the above transactions.
(b) Prepare the journal entries necessary at December 31, 2010, assuming that the books have been closed.
Solution
(a) Corrected net income
(b) Adjustment entries
