Question

Prior to 12/31/19, Maxwell Company provided for uncollectible accounts using the allowance method, but used the income statement approach for recording estimates of uncollectible accounts; accordingly, Maxwell did not adjust the balance in the Allowance account at year end.

At 1/1/19, Maxwell Company had $120,000 cr. in the Allowance for doubtful accounts. During 2019, credit sales totaled $8,000,000, and over the year, provisions of $160,000 (2% of credit sales) were added to the Allowance. In addition, $100,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000.

For the first time, at 12/31/19 Maxwell prepared an aging of its accounts receivable. A summary of this aging, along with estimates of collectability for each category, is as follows:

  
Classification by month of sale

Balance of A/R
Estimated % Uncollectible
November-December 2019
1,080,000
2%
July-October
650,000
10%
January-June
420,000
25%
Prior to 1/1/19
150,000
90%

2,300,000

Based on the review of collectability of the account balances in the “prior to 1/1/19” aging category, additional receivables totaling $70,000 were written off at 12/31/19. The 90% uncollectible estimate was applied to the remaining balance in the category in making the adjusting entry. As of the year ended 12/31/19, Maxwell adopted the balance sheet method for estimating the Allowance for doubtful accounts, as indicated in the year-end aging analysis.

Required:

   •   Prepare a schedule analyzing the changes in the Allowance for doubtful accounts for the year ended 12/31/19. Show supporting computations.
   •   Prepare the adjusting entry needed for 2019.
   •   Show how Accounts Receivable would appear on the Balance Sheet.

Answer 1

ANSWER

Allowance for Doubtful account at beginning balance Add: Provisions added to allowance Less: account write off Add: Recoveries of previously written off Less: account write off at December 31, 2019 Ending Allowance for Doubtful account balance before adjustment 120,000 160,000 (100,000) 15,000 (70,000) 125,000 Classification by month November - December 2019 July - October January - June Prior to 1/1/19 (150000-70000) Account receivable (Gross) Ending Allowance for Doubtful account balance After adjustment Balance of A/R 1,080,000 650,000 420,000 80,000 2,230,000 Estimated Uncollectible 2% 10% 25% 90% Allowance for Doubtful account 21,600 65,000 105,000 72,000 263,600 263,600 Ending Allowance for Doubtful account balance After adjustment Less: Ending Allowance for Doubtful account balance before adjustment 263,600 125,000

D 80,000 2,230,000 90% 72,000 263,600 Prior To 1/1/19 (150000-70000) Account receivable (Gross) Ending Allowance for Doubtful account balance After adjustment 263,600 Ending Allowance for Doubtful account balance After adjustment Less: Ending Allowance for Doubtful account balance before adjustment Adjustment for bad debt expense 263,600 125,000 138,600 Debit Credit 138,600 General Journal Bad debt expense Allowance for Doubtful account (To record Bad debts expense.) 138,600 Balance sheet Current assets Account receivable (Gross) Allowance for Doubtful account Account receivable (Net) 2,230,000 263,600 1,966,400

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