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 2017, accounts receivable were $596,000 and the allowance account had a credit balance of $60,000. Accounts receivable activity for 2018 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 2018?
3-b. How would accounts receivable appear in the 2018 balance sheet?

Answer 1

1
	Debit	Credit
Bad debt expense	54600		=2730000*2%
Allowance for uncollectible accounts		54600
Allowance for uncollectible accounts	50000
Accounts receivable		50000
2
Bad debt expense	31260
Allowance for uncollectible accounts		31260
3 (a)
Bad debt expense for 2018	85860
3 (b)
Balance sheet
Current assets:
Accounts receivable (net)	587140
Workings:
Age group	Amount	Percent Uncollectible	Estimated Allowance
0-60 days	425000	5%	21250
61-90 days	91000	14%	12740
91-120 days	60000	30%	18000
Over 120 days	107000	41%	43870
Totals	683000		95860
For 2
Allowance for uncollectible accounts:
Beginning balance	60000
Add: Monthly bad debt accruals	54600
Deduct: Write-offs	-50000
Balance before year-end adjustment	64600
Required allowance (determined above)	95860
Required year-end increase in allowance	31260	(95860-64600)
For 3 (a)
Monthly accruals	54600
Year-end adjustment	31260
Total Bad debt expense for 2018	85860
For 3 (b)
Accounts receivable, Gross	683000
Less: Allowance for uncollectible accounts	95860
Accounts receivable, net	587140