Doubtful accounts expense using allowance method

From inception of operations to December 31, 2010, Henry Corporation provided for uncollectible accounts receivable under the allowance method: Provisions were made monthly at 2 percent 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. Henry's usual credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was $325,000 at January 1, 2011. During 2011, credit sales totaled $22,500,000, interim provisions for doubtful accounts were made at 2 percent of credit sales, $225,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $37,500. Henry installed a computer system in November 2011 and an aging of accounts receivable was prepared for the first time as of December 31, 2011. A summary of the aging is as follows:



Based on the review of collectibility of the account balances in the "prior to January 1, 2011" aging category, additional receivables totaling $150,000 were written off as of December 31, 2011. Effective with the year ended December 31, 2011, Henry adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

(1) Prepare a schedule analyzing the changes in the allowance for doubtful accounts for the year ended December 31, 2011. Show supporting computations in good form.
(2) Prepare the journal entry for the year-end adjustment to the allowance for doubtful accounts balance as of December 31, 2011.

View printable version with solution

Adjusting entry for doubtful accounts expense #2

The following information was abstracted from the 2010 financial statements of Deddy Company:



Prepare the adjusting entry for doubtful accounts expense under each of the following assumption:

(1) 3 percent of current accounts receivable are uncollectible.
(2) 2.5 percent of net credit sales are uncollectible.

View printable version with solution

Error corrections and adjustment entries - net income

The controller for Giant Corporation is concerned about certain business transactions that the company experienced during 2010. The controller, after discussing these matters with various individuals, has come to you for advice. The transactions at issue are presented below.

1) The company has decided to switch from the direct write-off method in accounting for bad debt expense to the percentage-of-sales approach. Assume that Giant Corporation has recognized bad debt expense as the receivables have actually become uncollectible in the following way:



The controller estimates that an additional $163,500 will be charged off in 2011: $28,500 applicable to 2009 sales and $135,000 to 2010 sales.

2) Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such on account. At December 31, 2010, inventory billed and in the hands of consignees amounted to $1,000,000. The percentage markup on selling price is 20%. Assume that consigned inventory is sold the following year. The company uses the perpetual inventory system.

3) During the current year, the company sold $1,500,000 of goods on the installment basis. The cost of sales associated with these goods sold is $1,050,000. The company inadvertently handled these sales and related costs as part of the regular sales transactions. Cash of $430,000, including a down payment of $150,000, was collected on these installment sales during the current year. Due to questionable collectibility, the installment method was considered appropriate.

Instruction:

(a) Assume that Giant Corporation reported net income of $2,500,000 for 2010. Present a schedule showing the corrected net income after reviewing the above transactions.

(b) Prepare the journal entries necessary at December 31, 2010, assuming that the books have been closed.

Solution

(a) Corrected net income




(b) Adjustment entries