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 3% 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 2012, accounts receivable were dollar 586.000 and the allowance account had a credit balance of dollar 50,000. Accounts receivable activity for 2013 was as follows:  

Beginning balance	$586,000
Credit sales	2,680,000
Collictions	(2,543,000)
Write-offs	(45,000)
Ending balance	$678,000

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

	Summary
Age Group	Amount	Percent Uncollectible
0 -60 days	$400,000	4%
61-90 days	95,000	15
91-120 days	55,000	25
Over 120 days	128,000	36
Total	$678,000

Required:

1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year. (If no entry is required for a particular event, select "No journal entry required" in the first account field.)  

2. Prepare the necessary year-end adjusting entry for bad debt expense. (If no entry is required for an event, select "No journal entry required" in the first account field.)  

3.1 What is total bad debt expense for 2013?  

3.2 Calculate the amount of accounts receivable that would appear in the 2013 balance sheet?

Answer 1

Concepts and reason

‎Financial statements: These statements are reported by company at the end of each accounting year. They provide the details about a company’s annual earnings, cash available at the end of the year, assets and liabilities, stockholders’ equity, and retained earnings. The following are the basic financial statements:

• Income statement

• Balance sheet

• Statement of retained earnings

• Statement of cash flows

Balance sheet: Balance sheet refers to a statement of assets, liabilities and owner’s equity as on a particular date of the fiscal year of the business enterprise. It also depicts the financial status of a business enterprise in a nutshell.

Accounts Receivable: Accounts receivable is a financial claim or declaration which signifies that seller would receives cash from the buyer for the goods or services received within a short period. Accounts receivable is a current asset and it would be reported under balance sheet statement.

Allowance method: As the uncollectible accounts cannot be estimated at the time of credit sales, companies make an estimate in percentage as to how much amount could be uncollectible. Hence, this method of recording the bad debt expenses based on the estimate is referred to as allowance method. It is a method of writing off of bad debts expense. In this method the company does not wait for the bad debts to occur, rather it estimates the amount of bad debts before its occurrence. It is an estimation of extra funds from the sales or any other source which is set aside to be paid off for bad debt when bad debt arises.

Treatment of accounts written-off: When any amount is written-off as bad debts then written-off amount is deducted from both the accounts receivable and allowance for doubtful debts accounts in the allowance method of recording bad debts.

Uncollectible accounts: Company may not be able to collect the full amount from the sales made on credit; such unpaid amount is referred to as uncollectible accounts.

Bad debt expense: Since the revenues should match the expenses of a particular period of time, the bad debts are recorded as expenses that match with the revenues of that period. Such bad debts recognized are referred to as bad debt expense.

Write-off: The management reduces the value of an asset if the management decides that the value of the asset has decreased. This is referred as a write-off.

Accounts Receivable Aging Method: The Aging Method accounts receivables determine the amount of the ending balance of accounts receivable that will not to be collected. It considers the previous balance of allowances for uncollectible account.

• Therefore, the credit balance of the allowance for the uncollectible accounts is deducted from the targeted balance for allowance for uncollectible accounts to determine the uncollectible account expense.

• The debit balance of the allowance for the uncollectible accounts is added to the targeted balance for allowance for uncollectible accounts to determine the uncollectible account expense.

Fundamentals

Accounting Equation: This equation represents the association between the elements of the balance sheet (assets, liabilities, and stockholders’ equity). This is also called as balance sheet equation. The formula of accounting equation is depicted as follows:

Asset: The source which is possessed or controlled to generate income in the future is known as an asset. Examples: Cash, prepaid expense, Machinery, Goodwill, and Supplies.

Liability: Liability is an agreement made by the company to pay a certain amount for the goods or services received by the company in the past. Examples: Accounts Payable, Loans and Advances, and Outstanding Expenses

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known also as net assets of the company, which are assets minus liabilities. Examples: Retained Earnings, Dividends, and Capital.

Revenues: The income or earnings received by a company by its business activities are known as revenues. Examples: Sales revenue, service revenue, and gain from sale of investment.

Expenses: The costs borne by a company to produce and sell the goods and services to the customers are known as expenses. Examples: Salaries expense, Advertising expense, and income tax expense.

Journal is the book of original entry, where all the monetary transactions are recorded date-wise with the debit and credit entry. The record of business transactions in a chronological (day-to-day) order in the journal is referred to as journal entry.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Debit increases all asset accounts. Debit decreases all liabilities and stockholders’ equity account.

2.Credit increases all liabilities and stockholders’ equity account. Credit decreases all asset accounts.

1.1

Prepare journal entry to record the bad debt expenses for the year 2016.

Working note:

Determine the amount of bad debt expense.

1.2

Prepare journal entry to record the write-offs during the year.

2.

Prepare journal entry to record the allowance for uncollectible accounts.

Working note 1: Determine the ending balance before making adjsutement.

Working note 2: Determine the estimated or targeted balance of Allowance for Uncollectible Accounts is determined by multiplying the estimated percentage of uncollectible with the estimated amount in each category.

Note:

Working note 3: Determine the bad debt expense at the year end.

3.1

Calculate the total bad debts.

3.2

Calculate the amount of accounts receivable would be shown in the 2013 year-end balance sheet.

Working note: Determine accounts receivable (net).

Ans: Part 1.1

Part 1.2

Part 2

Part 3.1

The total bad debts for the year amounts to $85,080.

Part 3.2