Installment Jewelry Company has been in business for 5 years but has never had its financial statements audited. Engaged to audit them for 2019, you find that the company’s balance sheet carries no allowance for bad accounts. Bad accounts have been expensed as written-off and recoveries credited to income as collected. The company’s policy is to write off at December 31 of each year those accounts on which no collections have been received for three months. The installment contracts generally are for 2 years. On your recommendation, the company agrees to revise its accounts for 2019 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of credit sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table: Year of Sale Credit Sales Accounts Written Off Recoveries 2015 2016 2017 2018 2019 2015 $100,000 $550 $1,500 $450 2016 250,000 500 4,000 $2,650 $100 2017 300,000 1,300 13,350 $2,700 400 2018 168,750 1,500 5,000 500 2019 206,250 1,400 600 Accounts receivable at December 31, 2019, were as follows: 2018 credit sales $15,000 2019 credit sales 135,000 $150,000 Required: Prepare the adjusting journal entry or entries with appropriate explanations to set up the Allowance for Bad Accounts.
Installment Jewelry Company has been in business for 5 years but has never had its financial statements audited. Engaged to audit them for 2019, you find that the company’s balance sheet carries no allowance for bad accounts. Bad accounts have been expensed as written-off and recoveries credited to income as collected. The company’s policy is to write off at December 31 of each year those accounts on which no collections have been received for three months. The installment contracts generally are for 2 years. On your recommendation, the company agrees to revise its accounts for 2019 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of credit sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table: Year of Sale Credit Sales Accounts Written Off Recoveries 2015 2016 2017 2018 2019 2015 $100,000 $550 $1,500 $450 2016 250,000 500 4,000 $2,650 $100 2017 300,000 1,300 13,350 $2,700 400 2018 168,750 1,500 5,000 500 2019 206,250 1,400 600 Accounts receivable at December 31, 2019, were as follows: 2018 credit sales $15,000 2019 credit sales 135,000 $150,000 Required: Prepare the adjusting journal entry or entries with appropriate explanations to set up the Allowance for Bad Accounts.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
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.
Question
Installment Jewelry Company has been in business for 5 years but has never had its financial statements audited. Engaged to audit them for 2019, you find that the company’s balance sheet carries no allowance for bad accounts. Bad accounts have been expensed as written-off and recoveries credited to income as collected. The company’s policy is to write off at December 31 of each year those accounts on which no collections have been received for three months. The installment contracts generally are for 2 years.
On your recommendation, the company agrees to revise its accounts for 2019 to give effect to bad account treatment on the allowance basis. The allowance is to be based on a percentage of credit sales that is derived from the experience of prior years. Statistics for the past 5 years are shown in the following table:
| Year of Sale | Credit Sales | Accounts Written Off | Recoveries | ||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |||
| 2015 | $100,000 | $550 | $1,500 | $450 | |||
| 2016 | 250,000 | 500 | 4,000 | $2,650 | $100 | ||
| 2017 | 300,000 | 1,300 | 13,350 | $2,700 | 400 | ||
| 2018 | 168,750 | 1,500 | 5,000 | 500 | |||
| 2019 | 206,250 | 1,400 | 600 |
| 2018 credit sales | $15,000 |
| 2019 credit sales | 135,000 |
| $150,000 |
| Required: | |
| Prepare the |
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