Problem

Accounting for Uncollectible AccountsRedstone Mill is a manufacturer that makes all sales...

Accounting for Uncollectible Accounts

Redstone Mill is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $40 million. At the end of 2014, accounts receivable were presented in the company’s balance sheet as follows:

Accounts receivable from clients

$3,600,000

Less: Allowance for doubtful accounts

80,000

During 2015, $230,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $18,000 were subsequently collected. At the end of 2015, an aging of accounts receivable indicated a need for a $150,000 allowance to cover possible failure to collect the accounts currently outstanding.

Redstone Mill 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 2015.

2. Entries to record the $18,000 in accounts receivable that were subsequently collected.

3. The adjusting entry required at December 31, 2015, to increase the Allowance for Doubtful Accounts to $150,000.


b. Notice that the Allowance for Doubtful Accounts was only $80,000 at the end of 2014, but uncollectible accounts during 2015 totaled $212,000 ($230,000 less the $18,000 reinstated). Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2014? Explain.

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