Maintaining Control of Accounts Receivable The vice president of finance of K. Boom Chemical Company became concerned upon discovery that $76,000 of accounts receivable had been written off as uncollectible during the fiscal year ended May 31, 2000, and that an allowance for uncollectibles in the amount of $48,000 was needed to cover expected losses on accounts receivable at year-end. The manager of the accounts receivable department explained that the company had not previously done an aging schedule for its accounts receivable and that when one was done, the allowance for uncollectibles was much too small and an adjustment was needed.

The following journal entries were recorded to establish bad debt expense at 4 percent of the $400,000 of credit sales and to record the write-off of accounts receivable during the year:

In early June, a number of irate customers called, saying they had been told they must pay in advance for all purchases from K. Boom Chemical because of failure to pay past bills.
The customers claimed to have paid in full. The company also noticed that the manager of the accounts receivable department had not been to work for nearly 2 weeks and there was no answer on his home phone.

a. What was the ratio of bad debt expense to sales for 2000 for K. Boom Chemical? Is the vice president right to be concerned?

b. What action by the manager of accounts receivable might explain the apparent problem with accounts receivable?

c. Assume that a search of the accounts receivable written off as bad debts indicated that an initial bill and one follow-up bill had been sent. No further efforts had been made to collect from customers. What other actions might a company take to avoid such large bad debt losses?

d. If the company unexpectedly recovered $25,000 of receivables that had been written off earlier in the year, how should the company account for the recovery?

Transcribed Image Text:

Bad Debt Expense 16,000 Allowance for Uncollectibles 16,000 Allowance for Uncollectibles 76,000 Accounts Receivable 76,000 An additional entry to adjust bad debt expense and the Al- lowance for Uncollectibles at the end of the year was made as follows: Bad Debt Expense 108,000 Allowance for Uncollectibles 108,000