Week Two Individual Assignment the Robert Hughes Hardware Company
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 consider the following information:
1. Balance in the Allowance for Doubtful Accounts at January 1, 2010: $154,000
2. Credit sales for the year 2010: $9,000,000
3. Monthly provisions for doubtful accounts: 2% of credit sales
4. Bad debts written off: $95,000
5. Recoveries of accounts previously written off: $15,000
6. Additional receivables written off as of December 31, 2010: $60,000
7. Uncollectible estimate for the remaining balance in the "prior to 1/1/10" category: 70%
Based on this information, we can calculate the changes in the Allowance for Doubtful Accounts as follows:
1. Monthly provisions for doubtful accounts:
- Monthly credit sales: $9,000,000 / 12 = $750,000
- Monthly provision: $750,000 * 2% = $15,000
- Total monthly provisions: $15,000 * 12 = $180,000
2. Bad debts written off: $95,000
3. Recoveries of accounts previously written off: $15,000
4. Additional receivables written off: $60,000
5. Uncollectible estimate for the remaining balance in the "prior to 1/1/10" category:
- Remaining balance: $90,000
- Uncollectible estimate: $90,000 * 70% = $63,000
Now let's summarize the changes in the Allowance for Doubtful Accounts for the year ended December 31, 2010:
Beginning balance (January 1, 2010): $154,000
+ Monthly provisions: $180,000
+ Bad debts written off: $95,000
+ Recoveries of accounts previously written off: $15,000
+ Additional receivables written off: $60,000
+ Uncollectible estimate for remaining balance in "prior to 1/1/10" category: $63,000
The total changes in the Allowance for Doubtful Accounts for the year ended December 31, 2010 is $572,000.
To prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2010, we would debit the Bad Debts Expense account and credit the Allowance for Doubtful Accounts account for the total changes calculated above ($572,000). The journal entry would be as follows:
Bad Debts Expense 572,000
Allowance for Doubtful Accounts 572,000