Question

From its first day of operations to December 31, 2017, Concord Corporation provided for uncollectible accounts receivable under the allowance method: entries for bad debt expense were made monthly based on 2.15% of credit sales, bad debts that were written off were charged to the allowance account, recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments were made to the allowance account. Concord’s usual credit terms were net 30 days, and remain unchanged.

The balance in Allowance for Doubtful Accounts was $183,700 at January 1, 2017. During 2017, credit sales totalled $9.15 million, interim entries for bad debt expense were based on 2.15% of credit sales, $94,900 of bad debts were written off, and recoveries of accounts previously written off amounted to $13,800. Concord upgraded its computer facility in November 2017, and an aging of accounts receivable was prepared for the first time as at December 31, 2017.

A summary of the aging analysis follows:

Classification by Month of Sale Balance in Each Category Estimated % Uncollectible

November-December 2017 $1,090,000 9%

July-October 2017 652,000 12.9%

January-June 2017 413,500 20%

Before January 1, 2017 151,000 64%

Based on a review of how collectible the accounts really are in the “Before January 1, 2017” aging category, additional receivables totalling $65,700 were written off as at December 31, 2017. The 64% uncollectible estimate therefore only applies to the remaining $85,300 in the category. Finally, beginning with the year ended December 31, 2017, Concord adopted a new accounting method for estimating the allowance for doubtful accounts: it now uses the amount indicated by the year-end aging analysis of accounts receivable.

1. Calculate bad debt expense accrual and year end balance for the year ended December 31, 2017. (Hint: In calculating the allowance amount at December 31, 2017, subtract the $65,700 write off of receivables.)

2.Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as at December 31, 2017.

Answer 1

Solution:

1) Calculation of the Bad Debt Expense Accrual and Year End Balance for the Year Ended December 31, 2017:

First we have to Calculate the Allowance for Doubtful Accounts:

Category	Balance	Percentage	Doubtful Accounts
November-December 2017	$1,090,000	9%	$98,100
July-October 2017	$652,000	12.9%	$84,108
January-June 2017	$413,500	20%	$82,700
Before January 1, 2017	$151,000	64%	$96,640
			$361,548

Analysis of Changes in Allowance of Doubtful Debts for the Year Ended December 31, 2017:

Balance at January 1, 2017	$183,700
Provision for Doubtful Accounts ($9,150,000 * 2.15%)	$196,725
	$380,425
Recovery in 2017 Bad Debts Written Previously	$13,800
	$394,225
Deduct: Writeoff for 2017 ($65,700 + $85,300)	($151,000)
Balance at December 31, 2017 Before Change in Accounting Estimate	$243,225
Increase Due to Change in Accounting Estimate During 2017 ($361,548 - $243,225)	$118,323

Therefore, the Bad Debt Expense Accrual and Year End Balance for the Year Ended December 31, 2017 is $118,323.

2) Preparing the Journal Entry for the Year End Adjustment to the Allowance for Doubtful Accounts Balance as at December 31, 2017:

Date	General Journal	Debit	Credit
Dec 31, 2017	Bad Debt Expense	$118,323
	Allowance for Doubtful Accounts		$118,323