P7 4 (Bad Debt Reporting) From inception of operations to December 31, 2012, 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, 2012. During 2012, 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 2012, and an aging of accounts receivable was prepared for the first time as of December 31, 2012. A summary of the aging is as follows.
|
Classification by Month of Sale |
Balance in Each Category |
Estimated % Uncollectible |
|
November–December 2012 |
$1,080,000 |
2% |
|
July–October |
650,000 |
10% |
|
January–June |
420,000 |
25% |
|
Prior to 1/1/12 |
150,000 |
80% |
|
$2,300,000 |
||
Based on the review of collectibility of the account balances in the “prior to 1/1/12” aging category, additional receivables totaling $60,000 were written off as of December 31, 2012. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2012, 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, 2012 Show supporting computations in good form. (Hint: In computing the 12/31/12 allowance, subtract the $60,000 write off).
(b) Prepare the journal entry for the year end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2012.