Question
Installment Jewelry Company has been in business for 5 years but has never had its financial statements audited. Engaged to audit them for 2016, you
Installment Jewelry Company has been in business for 5 years but has never had its financial statements audited. Engaged to audit them for 2016, you find that the companys balance sheet carries no allowance for bad accounts. Bad accounts have been expensed as written-off and recoveries credited to income as collected. The companys 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 2016 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 | ||
2012 | 2013 | 2014 | 2015 | 2016 | |
2012 | $100,000 | $550 | $500 | $1,550 | |
2013 | 250,000 | 1,500 | 4,000 | $1,150 | $100 |
2014 | 300,000 | 1,300 | 4,000 | $2,700 | 400 |
2015 | 234,000 | 1,500 | 5,000 | 500 | |
2016 | 286,000 | 1,400 | 600 |
Accounts receivable at December 31, 2016, were as follows:
2015 credit sales | $15,000 |
2016 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. |
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