Walc Factory is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $20 million. At the end of 2010, accounts receivable were presented in the company’s balance sheet as follows:

Accounts receivable from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,800,000

Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000

During 2011, $115,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $9,000 were subsequently collected. At the end of 2011, an aging of accounts receivable indicated a need for a $75,000 allowance to cover possible failure to collect the accounts currently outstanding.

Walc Factory 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 2011.

2. Entries to record the $9,000 in accounts receivable that were subsequently collected.

3. The adjusting entry required at December 31, 2011, to increase the Allowance for Doubtful Accounts to $75,000.

b. Notice that the Allowance for Doubtful Accounts was only $40,000 at the end of 2010, but uncollectible accounts during 2011 totaled $106,000 ($115,000 less the $9,000 reinstated). Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2010? Explain.