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 $598,000 and the allowance account had a credit balance of $62,000. Accounts receivable activity for 2018 was as follows: Beginning balance $ 598,000 Credit sales 2,740,000 Collections (2,603,000 ) Write-offs (51,000 ) Ending balance $ 684,000 The company’s controller prepared the following aging summary of year-end accounts receivable: Summary Age Group Amount Percent Uncollectible 0–60 days $ 430,000 4 % 61–90 days 92,000 15 91–120 days 61,000 20 Over 120 days 101,000 35 Total $ 684,000

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

SOLUTION

1.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
A.	Bad debt expense ($2,740,000*2%)	54,800
	Allowance for uncollectible accounts		54,800
	(To record the monthly bad debt expesne)
B.	Allowance for uncollectible accounts	51,000
	Accounts receivable		51,000
	(To record the write off of receivables)

2. Estimated uncollected accounts-

Details (A)	Total AMount ($) (B)	Percentage considered uncollectible (%) (C)	Allowance for doubtful accounts (B*C)
0–60 days	430,000	4%	17,200
61–90 days	92,000	15%	13,800
91–120 days	61,000	20%	12,200
Over 120 days	101,000	35%	35,350
	684,000		78,550

Calculation of estimated amount of bad debt expense-

Particulars	Amount ($)
Beginning balance	62,000
Add: Monthly bad debt accrual	54,800
Less: Write offs	(51,000)
Balance before year end adjustments	65,800
Less: Estimated allowance	(78,550)
Year end increase in allownace	12,750

Journal entry-

Accounts titles and Explanation	Debit ($)	Credit ($)
Bad debt expense	12,750
Allowance for uncollectible accounts		12,750
(To record bad debt expense)

3A. Bad debt expense = Monthly bad debt accruals + Year end increase in allowance

= $54,800 + 12,750 = 67,550

3B. Balance sheet-

	Amount ($)	Amount ($)
Assets:
Current assets:
Accounts receivable	684,000
Less: Allowance for bad debts	(78,550)	605,450