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 3% 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 $586,000 and the allowance account had a credit balance of $50,000. Accounts receivable activity for 2021 was as follows:

Beginning balance	$	586,000
Credit sales		2,680,000
Collections		(2,543,000	)
Write-offs		(45,000	)
Ending balance	$	678,000

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

		Summary
Age Group	Amount		Percent Uncollectible
0−60 days	$	400,000	4	%
61−90 days		95,000	15
91−120 days		55,000	25
Over 120 days		128,000	36
Total	$	678,000

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

Answer 1

SOLUTION

1.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Bad debt expense	80,400
	Allowance for uncollectible accounts		80,400
2.	Allowance for uncollectible accounts	45,000
	Accounts receivable		45,000

Bad debt expense = Credit sales * 2%

= 2,680,000 * 3% = 80,400

2. Journal entry-

Accounts titles and Explanation	Debit ($)	Credit ($)
Bad debt expense	4,680
Allowance for uncollectible accounts		4,680

Working-

Estimated uncollectible accounts-

Details	Amount ($) (A)	Percentage uncollectible (B)	Estimated uncollectible amounts (A*B)
0-60 days	400,000	4%	16,000
61-90 days	95,000	15%	14,250
91-120 days	55,000	25%	13,750
Over 120 days	128,000	36%	46,080
	678,000		90,080

Bad debt expense at the year end-

Allowance for uncollectible accounts:
Beginning balance	50,000
Add: Monthly bad debt accruals	80,400
Deduct: Write offs	(45,000)
Balance before year end adjustment	85,400
Required allowance	90,080
Required year end increase in allowance	4,680

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

= 80,400 + 4,680 = 85,080

3B.

Assets	Amount ($)
Current assets:
Accounts receivable (net)	595,390

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

= 678,000 - 90,080 = 587,920