Problem 7-4 (Bad Debt Reporting) From inception of operations to 31 December 2019, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions were recorded based on analysis 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 at 1 January 2019. During 2019, credit sales totalled $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 2019, and an aging of accounts receivable was prepared for the first time as of 31 December 2019. A summary of the aging is as follows: Classification by Month of Sale Balance in Each Category Estimated % Uncollectible November to December 2019 $1,080,000 2% July to October 2019 January to June 2019 Prior to 1 January 2019 650,000 10% 420,000 25% 150,000 80% $2,300,000 Based on the review of collectability of the account balances in the “prior to 1 January 2019" aging category, additional receivables totalling $60,000 were written off as of 31 December 2019. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended 31 December 2019. 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 31 December 2019. Show supporting computations in good form. (b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of 31 December 2019.
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.
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