Question 2. Provision for Doubtful Debts

During the year of 2024, the credit sales of Mixed Enemy Fireworks Limited amounted to $56,600,000. At the end of the financial year (i.e., December 31, 2021) the balance in accounts receivable is $3,200,000. Of this balance $900,000 is found to overdue.

The CFO of Mixed Enemy Fireworks Limited examined each of the accounts receivable and found the following: (a) $275,000 were 0 to 30 days old; (b) $420,000 were 31 60 days old; (c) $375,000 were 61 to 90 days old; (d) $286,000 were 91 120 days old; and (e) the balance was greater than 121 days overdue.

The CFO based on prior experience estimates that 2% accounts receivable 0 to 30 days overdue will be uncollectible; 8% of the 31 to 60 days overdue; 12% of the 61 to 90 days overdue; 40% of the 91 to 120 days overdue; and 80% greater than 120 days overdue. Assume that accounts receivable not yet overdue are all presumed to be fully collectible.

a) Calculate the balance of provision for doubtful debts at the end of 2024 is using the percentage of credit sales approach if assumed 5% of total credit sales during 2024 would eventually be uncollectible. [2 Marks]

b) Calculate the balance of provision for doubtful debts at the end of 2024 using the aging method. [2 Marks]

c) Assume that the balance in the provision for doubtful debts at the end of 2024, before any adjustment, is a credit balance $16,900. Complete the necessary adjusting entry. [1 Mark]

d) Assume the amount of accounts receivable at the end of 2024 was $400,000. Show the appropriate balance sheet section related to accounts receivable (show a title please but only need portion for accounts receivable).