My friend Robert Hughes runs hardware business in down town Dallas. Because of competition he relies on neighborhood customers for sales. From inception of operations to December 31, 2010, Robert Hughes Hardware Company provided for uncollectible accounts receivable under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Robert Hughes Hardware Company's usual credit terms are net 30 days.
The balance in the Allowance for Doubtful Accounts was $154,000 at January 1, 2010. During 2010 credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $95,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Robert installed a computer facility in November 2010, and an aging of accounts receivable was prepared for thefirst time as of December 31, 2010. A summary of the aging is as follows.
Classification by Month of Balance in Each Category Estimated %
Sale Uncollectible
November–December 2010 $1,080,000 2%
July–October 650,000 10%
January–June 420,000 25%
Prior to 1/1/10 150,000 70%
$2,300,000
Based on the review of collectibility of the account balances in the “prior to 1/1/10”aging category, additional receivables totaling $60,000 were written off as of December31, 2010. The 70% uncollectible estimate applies to the remaining $90,000 in the category.Effective with the year ended December 31, 2010, Robert adopted a new accountingmethod for estimating the allowance for doubtful accounts at the amount indicatedby the year-end aging analysis of accounts receivable.
Robert called me and needs some help and wants me to suggest someone who can help him. I have suggested you. He would like you to prepare a schedule analyzing the changes in the Allowance for Doubtful Accountsfor the year ended December 31, 2010 and show supporting computations in goodform. (Hint: If it was me in computing the 12/31/10 allowance, I would subtract the $60,000 write-off, but that’s me).Robert would also like you to prepare the journal entry for the year-end adjustment to the Allowance forDoubtful Accounts balance as of December 31, 2010.
To prepare a schedule analyzing the changes in the Allowance for Doubtful Accounts for the year ended December 31, 2010, we need to go step-by-step through the provided information and perform the necessary calculations.
1. Begin with the balance in the Allowance for Doubtful Accounts at January 1, 2010, which is $154,000.
2. Calculate the provision for doubtful accounts for the year based on the 2% of credit sales. The credit sales for 2010 totaled $9,000,000, so the provision is $9,000,000 * 2% = $180,000.
3. Add the provision for doubtful accounts to the balance at the beginning of the year: $154,000 + $180,000 = $334,000. This is the adjusted balance before any write-offs or recoveries.
4. Deduct the amount of bad debts written off during the year, which is $95,000: $334,000 - $95,000 = $239,000.
5. Add any recoveries of accounts previously written off. In this case, the recoveries amount to $15,000: $239,000 + $15,000 = $254,000.
6. Analyze the aging of accounts receivable as of December 31, 2010, and determine the estimated uncollectible percentage for each category:
- November-December 2010: $1,080,000 * 2% = $21,600
- July-October: $650,000 * 10% = $65,000
- January-June: $420,000 * 25% = $105,000
- Prior to 1/1/10: ($150,000 * 70%) + $60,000 = $123,000
7. Calculate the total estimated uncollectible amount based on the above categories: $21,600 + $65,000 + $105,000 + $123,000 = $314,600.
8. Subtract any write-offs made as of December 31, 2010. From the prior information, we know that an additional $60,000 in receivables was written off, so we subtract that from the total estimated uncollectible amount: $314,600 - $60,000 = $254,600.
9. Compare the adjusted balance from step 5 ($254,000) with the total estimated uncollectible amount from step 8 ($254,600). Since they are close, we can assume they are equal.
Therefore, the Allowance for Doubtful Accounts balance for the year ended December 31, 2010, is $254,600.
To prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2010, the entry will depend on the balances carried forward from the previous year and the changes calculated above.
Assuming the Allowance for Doubtful Accounts had a credit balance at the beginning of the year, the journal entry would be as follows:
Allowance for Doubtful Accounts Dr $254,600
Bad Debt Expense Cr $254,600
This entry reflects an increase in the allowance for doubtful accounts, indicating the company's recognition of potential bad debts based on the aging analysis.