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Intermediate Accounting (Kieso)
Found in: Page 372

Short Answer

From inception of operations to December 31, 2017, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics. 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, 2017. During 2017, credit sales totalled $9,000,000, the provision for doubtful accounts was determined to be $180,000, $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 2017, and aging of accounts receivable was prepared for the first time as of December 31, 2017. A summary of the aging is as follows.

Classification by month of sale

Balance in each category

Estimated % uncollectible

November-December 2017

$1,080,000

2%

July-October

650,000

10%

January-June

420,000

25%

Prior to 1/1/17

150,000

80%

$2,300,000

Based on the review of collectibility of the account balances in the “prior to 1/1/17” aging category, additional receivables totaling $60,000 were written off as of December 31, 2017. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2017, 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, 2017. Show supporting computations in good form. (Hint: In computing the 12/31/17 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, 2017.

The adjusted balance at year-end is $263,600.

See the step by step solution

Step by Step Solution

Definition of Re-Financing

The process under which the business entity retires existing debt obligation by using a net debt obligation is known as re-financing. This re-financing is done under different terms of interest and period.

Schedule for Change in Allowance for Doubtful Accounts

Particular

Amount $

Balance on 1 January 2017

$130,000

Provision for doubtful accounts

180,000

Re-established credit

15,000

$325,000

Less: Bad-debts written off

(150,000)

Balance on 31 Dec 2017

$175,000

Increase due to change in accounting estimates during the year 2017

88,600

Adjusted Balance at 31 Dec 2017

$263,600

Schedule:

Classification by month of sale

Balance in each category

Estimated % uncollectible

Amount of Allowance

November-December 2017

$1,080,000

2%

$21,600

July-October

650,000

10%

65,000

January-June

420,000

25%

105,000

Prior to 1/1/17

90,000

80%

72,000

$2,300,000

$263,600

Journal Entry

Date

Accounts and Explanation

Debit $

Credit $

Bad debt expenses

$88,600

Allowance for doubtful accounts

$88,600

(To increase the balance in the allowance account due to change in estimates)

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