Redstone Mill is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $40 million. At the end of 2014, accounts receivable were presented in the company's balance sheet as follows:
Accounts receivable from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,600,000
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80,000
During 2015, $230,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $18,000 were subsequently collected. At the end of 2015, an aging of accounts receivable indicated a need for a $150,000 allowance to cover possible failure to collect the accounts currently outstanding.
Redstone Mill makes adjusting entries for uncollectible accounts only at year-end.
Instructions
a. Prepare the following general journal entries:
1. One entry to summarize all accounts written off against the Allowance for Doubtful Accounts during 2015.
2. Entries to record the $18,000 in accounts receivable that were subsequently collected.
3. The adjusting entry required at December 31, 2015, to increase the Allowance for Doubtful Accounts to $150,000.
b. Notice that the Allowance for Doubtful Accounts was only $80,000 at the end of 2014, but uncollectible accounts during 2015 totaled $212,000 ($230,000 less the $18,000 reinstated). Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2014? Explain.