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 2020, accounts receivable were $608,000 and the allowance account had a credit balance of $72,000. Accounts receivable activity for 2021 was as follows:

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 2021?
3-b. How would accounts receivable appear in the 2021 balance sheet?

Beginning balance Credit sales $ 608,000 2,790,000 (2,653,000) (56,000) Collections Write-offs 689,000 Ending balance The company's controller prepared the following aging summary of year-end accounts receivable: Summary Percent Uncollectible Age Group 0-60 days 61-90 days 91-120 days Over 120 days Amount $455,000 76,000 66,000 92,000 5 % 14 25 40 $689,000 Total

Answer 1

SOLUTION

1.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Bad debt expense	55,800
	Allowance for uncollectible accounts		55,800
2.	Allowance for uncollectible accounts	56,000
	Accounts receivable		56,000

Bad debt expense = Credit sales * 2%

= 2,790,000 * 2% = 55,800

2. Journal entry-

Accounts titles and Explanation	Debit ($)	Credit ($)
Bad debt expense	14,890
Allowance for uncollectible accounts		14,890

Working-

Estimated uncollectible accounts-

Details	Amount ($) (A)	Percentage uncollectible (B)	Estimated uncollectible amounts (A*B)
0-60 days	455,000	5%	22,750
61-90 days	76,000	14%	10,640
91-120 days	66,000	25%	16,500
Over 120 days	92,000	40%	36,800
	689,000		86,690

Bad debt expense at the year end-

Allowance for uncollectible accounts:
Beginning balance	72,000
Add: Monthly bad debt accruals	55,800
Deduct: Write offs	(56,000)
Balance before year end adjustment	71,800
Required allowance	86,690
Required year end increase in allowance	14,890

3A. Total bad debts = Bad debts during the year + Year end Bad debt expense

= 55,800 + 14,890 = 70,690

3B.

Assets	Amount ($)
Current assets:
Accounts receivable (net)	602,310

Accounts receivable (net) = Accounts receivable (gross) - Allowance for uncollectible account

= 689,000 - 86,690 = 602,310