Accounting for Uncollectable; Accounts
Wale Factory is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $20 million. At the end of 2010, accounts receivable were presented in the company's balance sheet as follows:
Accountsreceivable from clients | $1,8000,000 |
Less: Allowance for doubtful accounts | 40,000 |
During 2011 , S115,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totalling $9,000were subsequently collected. Attheendof2011, an aging of accounts receivable indicated a need for a $75,000 allowance to cover possible failure to collect the accounts currently outstanding.
Wale Factory makes adjusting entries for uncollectible accounts only at year-end.
Instructions
a. Prepare the following general journal entries:
1. One entry to summarize all accounts written off against the Allowance for Doubtful Accounts during 2011.
2. Entries to record the $9,000 in accounts receivable that were subsequently collected.
3. The adjusting entry required at December 31 , 2011 . to increase the Allowance for Doubtful Accounts to $75,000.
b. Notice that the Allowance for Doubtful Accounts was only $40,000 at the end of 2010, but uncollectible accounts during 2011 totalled $106,000 ($115,000 less the $9,000 reinstated).Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2010? Explain.
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