Question

From its first day of operations to December 31, 2020, Pronghorn Corp. provided for uncollectible accounts receivable under the allowance method:

1.		Entries for bad debt expense were made monthly based on 2.5% of credit sales.
2.		Bad debts that were written off were charged to the Allowance for Doubtful Accounts.
3.		Recoveries of bad debts previously written off were credited to the allowance account.
4.		No year-end adjustments were made to the allowance account.

The balance in Allowance for Doubtful Accounts was $178,000 at January 1, 2020. During 2020, credit sales totalled $9.5 million, interim entries for bad debt expense were based on 2.5% of credit sales, $82,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $13,000. Pronghorn upgraded its computer facility in November 2020, and an aging of accounts receivable was prepared for the first time as at December 31, 2020. Campbell’s usual credit terms were net 30 days, and remain unchanged.

A summary of the aging analysis follows:

Classification by Month of Sale		Balance in Each Category				Estimated % Uncollectible
November-December 2020			$1,050,000			7%
July-October 2020			745,000			11.0%
January-June 2020			450,000			25%
Before January 1, 2020			156,000			70%
			$2,401,000

Based on a review of how collectible the accounts really are in the “Before January 1, 2020” aging category, additional receivables totalling $72,000 were written off as at December 31, 2020. The 70% uncollectible estimate therefore only applies to the remaining $84,000 in the category. Finally, beginning with the year ended December 31, 2020, Pronghorn adopted a new accounting method for estimating the allowance for doubtful accounts: it now uses the amount in the year-end aging analysis of accounts receivable.

Prepare a schedule that analyzes the changes in Allowance for Doubtful Accounts for the year ended December 31, 2020. (Hint: In calculating the allowance amount at December 31, 2020, subtract the $72,000 write off of receivables.)

Balance at January 1, 2020		$178,000
Bad debt expense accrued in 2020
Recovery of bad debts in 2020 previously written off
Write offs for 2020
Change in accounting estimate during 2020
Balance at December 31, 2020 adjusted		$

SHOW LIST OF ACCOUNTS

Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
(To record adjustment resulting from a change in accounting estimate)

Answer 1

Amounts are in $

(a)

Category	Balance	Percentage	Doubtful allowance
Nov - Dec 2020	1,050,000	7%	73,500
July - Oct 2020	745,000	11%	81,950
Jan - June 2020	450,000	25%	112,500
Before Jan 2020	84,000	70%	58,800
			326,750

Note : Balance for Before Jan 2020 is taken after reducing the $72,000 amount

(b)

Journal entry

Bad debts expense $52,250

Allowance for doubtful accounts $52,250

(Shortage in Provision made, now rectified as per new estimates)

Workings :

Opening balance = 178,000

Current year provision = 237,500 (2.5% on 9.5 million)

Bad debts written off = (82,000)

Recovery of bad debts = 13,000

Closing balance = 346,500

Actual provision required is 326,750

Excess provision already made = 19,750

Additional receivables to be written off = 72,000

So net amount to be carried to expense now = 52,250 (72,000 - 19,750)