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 $610,000 and the allowance account had a credit balance of $74,000. Accounts receivable activity for 2018 was as follows:

Beginning balance	$	610,000
Credit sales		2,800,000
Collections		(2,663,000	)
Write-offs		(57,000	)
Ending balance	$	690,000

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

		Summary
Age Group	Amount		Percent Uncollectible
0–60 days	$	460,000	4	%
61–90 days		78,000	15
91–120 days		67,000	26
Over 120 days		85,000	41
Total	$	690,000

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

Req 1.
Journal Entries:
S.No.	Accounts title and explanations				Debit	Credit
1	Bad debts accruals Dr. (2800,000*2%)				56,000
	Allowance for Uncollectible Accounts					56,000
	(for accruals of bad debt)
2	Allowance for Uncollectible Accounts Dr.				57,000
	Accounts receivable					57,000
	(for write off)
Req 2
3	Bad debts expense Dr.				65370
	Allowance for Uncollectible Accounts					9370
	Bad debts accruals					56000
	(for maintaining the allowance account balance and closing the bad debts accruals)
Note: Required balance in Allowance accounts:
Age-group		Amount	% Uncollectible		Estimated Allowance required
0-60 days		460,000	4%		18400
61-90 dys		78,000	15%		11700
91-120 days		67,000	26%		17420
over 120 days		85,000	41%		34850
		690,000			82370
Allowance accounts actual balance:
Beginning balance			74000
Add: Accruals			56000
Less: Write off			-57000
Balance in hand			73000
Required balance			82370
Transferred to Allowance			9370
Req 3:
Total Bad debts expense:
Transfer to allowance at the end:				9370
Add: Transfer to allowance through accruals				56000
Bad debts expense				65370
Req 4:
Accounts receivable balance in Balance Ssheet
Accounts receivable (Gross)				690,000
Less; Allowance for uncollectible Accounts				82370
Accounts receivable balance (net)				607,630