Question

Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.

At the end of 2020, accounts receivable were $596,000 and the allowance account had a credit balance of $60,000. Accounts receivable activity for 2021 was as follows:

Beginning balance	$	596,000
Credit sales		2,730,000
Collections		(2,593,000	)
Write-offs		(50,000	)
Ending balance	$	683,000

The company’s controller prepared the following aging summary of year-end accounts receivable:

		Summary
Age Group	Amount		Percent Uncollectible
0−60 days	$	425,000	5	%
61−90 days		91,000	14
91−120 days		60,000	30
Over 120 days		107,000	41
Total	$	683,000

Required:
1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year.
2. Prepare the necessary year-end adjusting entry for bad debt expense.
3-a. What is total bad debt expense for 2021?
3-b. How would accounts receivable appear in the 2021 balance sheet?
  

Answer 1

Solution 1:
Journal Entry 1 - Swathmore clothing corporation
Event	Particulars	Debit	Credit
1	Bad debts expense Dr ($2,730,000*2%/12)	$4,550.00
	To Allowance for uncollectible accounts		$4,550.00
	(To record monthly accrual for bad debts)
2	Allowance for uncollectible accounts Dr	$50,000.00
	To Accounts receivables		$50,000.00
	(To written of accounts receivables)

Solution 2:
Computation of Allowance for Uncollectible Accounts
Ageing	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	$425,000.00	5%	$21,250.00
61-90 days	$91,000.00	14%	$12,740.00
91-120 days	$60,000.00	30%	$18,000.00
Over 120 days	$107,000.00	41%	$43,870.00
Total	$683,000.00		$95,860.00

Journal Entry 2 - Swathmore clothing corporation
Event	Particulars	Debit	Credit
1	Bad debts Expense Dr [$95,860 - ($60,000 + $54,600 - $50,000)]	$31,260.00
	To Allowance for doubtful accounts		$31,260.00
	(To record bad debts expense)

Solution 3a:
total bad debt expense for 2021 = $54,600 + $31,260 = $85,860
Solution 3b:
Balance Sheet
Current Assets:
Accounts receivables, net ($683,000 - $95,860)	$587,140.00