Question
From its first day of operations to December 31, 2017, Cheyenne Corp. provided for uncollectible accounts receivable under the allowance method: entries for bad debt
From its first day of operations to December 31, 2017, Cheyenne Corp. provided for uncollectible accounts receivable under the allowance method: entries for bad debt expense were made monthly based on 2.40% of credit sales, bad debts that were 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 were made to the allowance account. Cheyennes usual credit terms were net 30 days, and remain unchanged.
The balance in Allowance for Doubtful Accounts was $184,100 at January 1, 2017. During 2017, credit sales totalled $9.00 million, interim entries for bad debt expense were based on 2.40% of credit sales, $95,300 of bad debts were written off, and recoveries of accounts previously written off amounted to $13,000. Cheyenne upgraded its computer facility in November 2017, and an aging of accounts receivable was prepared for the first time as at December 31, 2017.
A summary of the aging analysis follows:
Classification by Month of Sale | Balance in Each Category | Estimated % Uncollectible |
November-December 2017 | $1,078,000 | 8% |
July-October 2017 | 635,000 | 13.2% |
January-June 2017 | 427,500 | 22% |
Before January 1, 2017 | 145,500 | 63% |
Based on a review of how collectible the accounts really are in the Before January 1, 2017 aging category, additional receivables totalling $68,000 were written off as at December 31, 2017. The 63% uncollectible estimate therefore only applies to the remaining $77,500 in the category. Finally, beginning with the year ended December 31, 2017, Cheyenne adopted a new accounting method for estimating the allowance for doubtful accounts: it now uses the amount indicated by the year-end aging analysis of accounts receivable.
Prepare a schedule that analyzes the changes in Allowance for Doubtful Accounts for the year ended December 31, 2017. (Hint: In calculating the allowance amount at December 31, 2017, subtract the $68,000 write off of receivables.)
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