From inception of operations in 2017, Summit carried no allowance for uncollectible accounts. Uncollectible receivables were expensed as written off, and recoveries were credited to income as collected. On March 1, 2021, after the 2020 financial statements were issued, management recognized that Summit's accounting policy with respect to uncollectible accounts was not correct, and determined that an allowance for uncollectible accounts was necessary. A policy was established to maintain an allowance for uncollectible accounts, based on Summit's historical bad debt loss percentage applied to yearend accounts receivable. The historical bad debts loss percentage is to be recomputed based on the relationship of net writeoffs to credit sales for all available past years up to a maximum of 5 years. Information from Summit's records for 5 years is as follows: Year Credit Sales Accounts Written Off Recoveries 2017 1,500,000 15,000 2018 2,250,000 38,000 2,700 2019 2,950,000 52,000 2,500 2020 3,300,000 65,000 4,800 2021 4,000,000 83,000 5,000 Accounts receivable balances were P1,250,000 and P1,460,000 at December 31, 2020 and December 31, 2021 respectively. REQUIRED: (a) Prepare the journal entry, with appropriate explanation, to set up the allowance for uncollectible accounts as of January 1, 2021. Disregard income taxes. Show supporting computations in good form. (b) Prepare a schedule analyzing the changes in the allowance for uncollectible accounts for the year ended December 31, 2021. Show supporting computations in good form.
From inception of operations in 2017, Summit carried no allowance for uncollectible accounts. Uncollectible receivables were expensed as written off, and recoveries were credited to income as collected. On March 1, 2021, after the 2020 financial statements were issued, management recognized that Summit's accounting policy with respect to uncollectible accounts was not correct, and determined that an allowance for uncollectible accounts was necessary. A policy was established to maintain an allowance for uncollectible accounts, based on Summit's historical bad debt loss percentage applied to yearend accounts receivable. The historical bad debts loss percentage is to be recomputed based on the relationship of net writeoffs to credit sales for all available past years up to a maximum of 5 years. Information from Summit's records for 5 years is as follows: Year Credit Sales Accounts Written Off Recoveries 2017 1,500,000 15,000 2018 2,250,000 38,000 2,700 2019 2,950,000 52,000 2,500 2020 3,300,000 65,000 4,800 2021 4,000,000 83,000 5,000 Accounts receivable balances were P1,250,000 and P1,460,000 at December 31, 2020 and December 31, 2021 respectively. REQUIRED: (a) Prepare the journal entry, with appropriate explanation, to set up the allowance for uncollectible accounts as of January 1, 2021. Disregard income taxes. Show supporting computations in good form. (b) Prepare a schedule analyzing the changes in the allowance for uncollectible accounts for the year ended December 31, 2021. Show supporting computations in good form.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 7
From inception of operations in 2017, Summit carried no allowance for uncollectible
accounts. Uncollectible receivables were expensed as written off, and recoveries
were credited to income as collected. On March 1, 2021, after the 2020 financial
statements were issued, management recognized that Summit's accounting policy
with respect to uncollectible accounts was not correct, and determined that an
allowance for uncollectible accounts was necessary. A policy was established to
maintain an allowance for uncollectible accounts, based on Summit's historical bad
debt loss percentage applied to yearend accounts receivable. The historical bad
debts loss percentage is to be recomputed based on the relationship of net
writeoffs to credit sales for all available past years up to a maximum of 5 years.
Information from Summit's records for 5 years is as follows:
Year
Credit Sales
Accounts Written Off
Recoveries
2017
1,500,000
15,000
2018
2,250,000
38,000
2,700
2019
2,950,000
52,000
2,500
2020
3,300,000
65,000
4,800
2021
4,000,000
83,000
5,000
Accounts receivable balances were P1,250,000 and P1,460,000 at December 31, 2020
and December 31, 2021 respectively.
REQUIRED:
(a) Prepare the journal entry, with appropriate explanation, to set up the allowance
for uncollectible accounts as of January 1, 2021. Disregard income taxes. Show
supporting computations in good form.
(b) Prepare a schedule analyzing the changes in the allowance for uncollectible
accounts for the year ended December 31, 2021. Show supporting computations in
good form.
AICPA Adapted
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