From inception of operations to December 31, 2020, 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 (Cr.) at January 1, 2020. During 2020, credit sales totaled $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 2020, and an aging of accounts receivable was prepared for the first time as of December 31, 2020. A summary of the aging is as follows. Classification by Monthof Sale Balance inEach Category Estimated %Uncollectible November–December 2020 $1,080,000 2% July–October 650,000 10% January–June 420,000 25% Prior to 1/1/20 150,000 80% $2,300,000 Based on the review of collectibility of the account balances in the “prior to 1/1/20” aging category, additional receivables totaling $60,000 were written off as of December 31, 2020. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2020, 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, 2020. Show supporting computations in good form. (Hint: In computing the 12/31/20 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, 2020.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
From inception of operations to December 31, 2020, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics.
The balance in Allowance for Doubtful Accounts was $130,000 (Cr.) at January 1, 2020. During 2020, credit sales totaled $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 2020, and an aging of accounts receivable was prepared for the first time as of December 31, 2020. A summary of the aging is as follows.
| Classification by Month of Sale |
Balance in Each Category |
Estimated % Uncollectible |
||
| November–December 2020 | $1,080,000 | 2% | ||
| July–October | 650,000 | 10% | ||
| January–June | 420,000 | 25% | ||
| Prior to 1/1/20 | 150,000 | 80% | ||
| $2,300,000 |
Based on the review of collectibility of the account balances in the “prior to 1/1/20” aging category, additional receivables totaling $60,000 were written off as of December 31, 2020. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2020, 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, 2020. Show supporting computations in good form. (Hint: In computing the 12/31/20 allowance, subtract the $60,000 write-off.)
b. Prepare the
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