The Following Series of Transactions Occurred During Year 1 and Year

question 148

Essay

The following series of transactions occurred during Year 1 and Year 2, when Linwood Co. sold merchandise to John Moore. Linwood's annual accounting period ends on December 31.
10/01/Yr 1 Sold $12,000 of merchandise to John Moore, terms 2/10, n/30.
11/15/Yr 1 Moore reports that he cannot pay the account until early next year. He agrees to exchange the account for a 120-day, 12% note receivable.
12/31/Yr 1 Prepared the adjusting journal entry to record accrued interest on the note.
03/15/Yr 2 Linwood receives a check from Moore for the maturity value (with interest) of the note.
03/22/Yr 2 Linwood receives notification that Moore's check is being returned for nonsufficient funds (NSF).
12/31/Yr 2 Linwood writes off Moore's account as uncollectible.
Prepare Linwood Co.'s journal entries to record the above transactions. The company uses the allowance method to account for its bad debt expense.

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Definitions:

Internalized

The process of incorporating external costs or benefits into the market price of goods or services.

Efficient

Refers to a situation where resources are utilized in the best possible manner to produce desired outcomes without wasting materials, energy, or time.

Government Intervention

Actions taken by a government to influence or regulate different aspects of its economy.

Coase Theorem

Suggests that if property rights are clearly defined and transaction costs are low, parties will negotiate to solve externalities on their own.