Question

Accounts receivable for Smith Ltd. were reported on the statement of financial position prepared at the end of 20X8, as follows:

 

Additional information:
The company sells goods on account. At the end of the year, accounts receivable are aged and the following percentages are applied in arriving at an estimate of the charge for doubtful accounts.

Estimated loss

Current accounts .............................................................    0%

Accounts 1–2 months overdue .....................................    7%

Accounts 3–6 months overdue .....................................    20%

Accounts 7–12 months overdue .....................................  50%

Accounts more than 1 year overdue ..............................  95%

At the end of the year, most of the accounts receivable are current. However, the aging schedule (after write offs and recoveries) shows the following:

Accounts 1–2 months overdue .....................................    $7,500
Accounts 3–6 months overdue .....................................      6,100
Accounts 7–12 months overdue ...................................      2,500
Accounts more than 1 year overdue..............................        880

 

Required:

1. Give the entries required to record the transactions listed above and also to adjust the accounts.

2. Calculate the balance for accounts receivable and the related allowances as at 31 December 20X9, and show these accounts as they will appear on the statement of financial position.

Answer 1

Requirement 1

 

1.  Allowance for doubtful accounts..................................................... 2,150

               Accounts receivable...........................................................................          2,150

 

2.    Accounts receivable............................................................................. 650

               Allowance for doubtful accounts......................................................             650

       Cash.....................................................................................................   650

               Accounts receivable...........................................................................             650

       (Or, one entry that debts cash and credits the allowance)

 

3.    Bad debt expense............................................................................. 1,801

               Allowance for doubtful accounts......................................................          1,801                           

       Desired balance 

               ($7,500 x 7%) + ($6,100 x 20%) + ($2,500 x 50%) 

               + ($880 x 95%)  $ 3,831

       Existing balance ($3,530 - $2,150 + $650)  2,030 cr

       Adjustment    $ 1,801

 

 

Requirement 2

 

Accounts receivable (1)				$120,750
	Less:      Allowance for doubtful accounts			$3,831
				$116,919

 

(1) $122,900 - $2,150