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 $576,000 and the allowance account had a credit balance of $40,000. Accounts receivable activity for 2021 was as follows:

Beginning balance	$	576,000
Credit sales		2,630,000
Collections		(2,493,000	)
Write-offs		(40,000	)
Ending balance	$	673,000

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

		Summary
Age Group	Amount		Percent Uncollectible
0−60 days	$	435,000	3	%
61−90 days		98,000	10
91−120 days		50,000	20
Over 120 days		90,000	30
Total	$	673,000

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
Swathmore Clothing Corporation
Journal Entries
Event	Particulars	Debit	Credit
1	Bad debts expense Dr ($2,630,000*2%)	$52,600
	To Allowance for doubtful accounts		$52,600
	(To record monthly bad debts accrual)
2	Allowance for doubtful accounts Dr	$40,000
	To Accounts Receivable		$40,000
	(To record write off during the year)

SOLUTION 2
Year end Adjusting Journal Entries
Event	Particulars	Debit	Credit
1	Bad debts expense Dr ($59850-$52600-$40000+$40000)	$7,250
	To Allowance for doubtful accounts		$7,250
	(To record year end adjusting entry for bad debts expense)
	Computation of Year end estimated uncollectibles
	Age	Balance	% Uncollectibles	Estimated Uncollectibles
	0-60 days	$4,35,000	3%	$13,050
	61-90 days	$98,000	10%	$9,800
	91-120 days	$50,000	20%	$10,000
	Over 120 days	$90,000	30%	$27,000
	Total			$59,850

SOLUTION 3A

Total bad debt expense for 2021 = 52600+7250 = $59,850

SOLUTION 3B
	Swathmore Clothing Corporation
	Balance Sheet (Partial)
	Current assets:
	Accounts receivables (Net) [$673000-$59850]	$6,13,150