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 $614,000 and the allowance account had a credit balance of $78,000. Accounts receivable activity for 2018 was as follows:

beginning balance	$614,000
credit sales	2,820,000
collections	(2,683,000)
write-offs	(59,000)
ending balance	$692,000)

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

age group	amount	percent uncollectible
0-60 days	$470,000	5%
61-90 days	82,000	11%
91-120 days	69,000	28%
over 120 days	71,000	36%
total	$692,000

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

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Part 1
Accounts	Debit	Credit
Bad Debt Expense	$            56,400
Allowance for doubtful accounts		$                56,400
(To record bad debt accrual) $2,820,000*2%
Allowance for doubtful accounts	$            59,000
Accounts receivable		$                59,000
(To record write off)
Part 2
Bad Debt Expense	$              2,000
Allowance for doubtful accounts		$                  2,000
(To record year end adjusting entries)
Age Group	Amount	% Uncollectible	Estimated Allowance
0-60 days	$          470,000	5.00%	$                            23,500
61-90 days	$            82,000	11.00%	$                              9,020
91-120 days	$            69,000	28.00%	$                            19,320
over 120 days	$            71,000	36.00%	$                            25,560
Total	$          692,000		$                            77,400
Beginning Balance		$                78,000
Add: Bad Debt accrual		$                56,400
Less: Write off		$             (59,000)
Balance before year end adjustments		$                75,400
Required Allowance		$             (77,400)
Required Year end increase in allowance		$                (2,000)
Part 3a
Monthly Accrual		$                56,400
Add: Year End adjustment		$                  2,000
Bad debt expense for year		$                58,400
Part 3b
Current Assets:
Accounts Receivable, net of $77,400		$             614,600
allowance for uncollectible accounts
$692,000-$77,400