P7-4 (bad-debt reporting) from inception of operations to december

Ch. 7 Problems: P7-4

 

P7-4 (Bad-Debt Reporting) From inception of operations to December 31, 2014, Fortner Corporation 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. Fortner’s usual credit terms are net 30 days.

 The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2014, and an aging of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the aging is as follows.

 

 Classification by Month of Sale

Balance in Each Category

Estimated % Uncollectible

November–December 2014

$1,080,000

 2%

July–October

   650,000

10%

January–June

   420,000

25%

Prior to 1/1/14

   150,000

80%

 

$2,300,000

 

 Based on the review of collectibility of the account balances in the “prior to 1/1/14” aging category, additional receivables totaling $60,000 were written off as of December 31, 2014. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2014, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

 Instructions

 (a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2014. Show supporting computations in good form. (Hint: In computing the 12/31/14 allowance, subtract the $60,000 write-off.)

 

 

(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2014.

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