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 $596,000 and the allowance account had a credit balance of $60,000. Accounts receivable activity for 2018 was as follows:

Beginning balance	$	596,000
Credit sales		2,730,000
Collections		(2,593,000	)
Write-offs		(50,000	)
Ending balance	$	683,000

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

		Summary
Age Group	Amount		Percent Uncollectible
0–60 days	$	425,000	5	%
61–90 days		91,000	14
91–120 days		60,000	30
Over 120 days		107,000	41
Total	$	683,000

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

Answer

• All working forms part of the answer
• Requirement 1

	Accounts title	Debit	Credit
1	Bad Debt Expense [2730000 Credit sale x 2%]	$54,600
	Allowance for Uncollectible account		$54,600
	(to record monthly bad debt accrual summary)
2	Allowance for Uncollectible accounts	$50,000
	Accounts receivables		$50,000
	(to record write off during the year)

• Requirement 2

Accounts title	Debit	Credit
Bad Debt Expense	$31,260
Allowance for Uncollectible account		$31,260
(to record adjusting entry)

--Working

Age Group	Amount	% Uncollectible	Estimated adjusted balance for Allowance account
1	$425,000	5%	$21,250
2	$91,000	14%	$12,740
3	$60,000	30%	$18,000
4	$107,000	41%	$43,870
	$683,000		$95,860
Calculation of unadjusted Allowance account balance:
Beginning Balance			$60,000
Total of monthky accruals			$54,600
Total Write offs			($50,000)
Unadjusted Balance			$64,600
Bad Debt Expense for adjusting entry [95860 - 64600]			$31,260
Age Group	Amount	% Uncollectible	Estimated adjusted balance for Allowance account
1	$425,000	5%	$21,250
2	$91,000	14%	$12,740
3	$60,000	30%	$18,000
4	$107,000	41%	$43,870
	$683,000		$95,860
Calculation of unadjusted Allowance account balance:
Beginning Balance			$60,000
Total of monthky accruals			$54,600
Total Write offs			($50,000)
Unadjusted Balance			$64,600
Bad Debt Expense for adjusting entry [95860 - 64600]			$31,260

• Requirement 3 ‘a’

Monthly accruals	$54,600
Adjusting entry	$31,260
Total Bad Debt Expense for 2018	$85,860

• Requirement 3 ‘b’

Balance Sheet - Partial
Current Assets:
Accounts receivables	$683,000
Less: Allowance for Uncollectible accounts	$95,860
Accounts receivables, net realizable value		$587,140