Allowance Method: Analysis of Receivables.
At a January 20X2 meeting, the president of Sonic Sound directed the sales staff “to move some product this year.” The president noted that the credit evaluation department was being disbanded because it had restricted the company’s growth.
Credit decisions would now be made by the sales staff.
By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department:
|
Sales |
20X2 |
20X1 |
|
Accounts Receivable, 12/31 |
23,987,000 |
8,423,000 |
|
Allowance for Uncollectible Accounts, 12/31 ? |
12,444,000 |
1,056,000 |
|
Allowance for Uncollectible Accounts, 12/31 |
? |
23,000 cr. |
The $12,444,000 receivables balance was aged as follows:
|
Age of Receivable |
Amount |
Percentage of Accounts Expected to Be Collected |
|
Under 31 days |
5,321,000 |
99% |
|
31 to 60 days |
3,890,000 |
90% |
|
61 to 90 days |
1,067,000 |
80% |
|
Over 90 days |
2,166,000 |
60% |
Assume that no accounts were written off during 20X2.
Instructions
a. Estimate the amount of Uncollectible Accounts as of December 31, 20X2.
b. What is the company’s Uncollectible Accounts expense for 20X2?
c. Compute the net realizable value of Accounts Receivable at the end of 20X1 and 20X2.
d. Compute the net realizable value at the end of 20X1 and 20X2 as a percentage of respective year-end receivables balances. Analyze your findings and comment on the president’s decision to close the credit evaluation department.