Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Chapter 5, Problem 5.7BP
Underestimating future uncollectible accounts (LO5–3, 5–5)
By the end of its first year of operations, Previts Corporation has credit sales of $750,000 and accounts receivable of $350,000. Given it’s the first year of operations. Previts’ management is unsure how much allowance for uncollectible accounts it should establish. One of the company’s competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 2% of ending accounts receivable, so Previts decides to use that same amount. However, actual write-offs in the following year were 25% of the $350,000 (= $87,500). Previts’ inexperience in the industry led to making sales to high credit risk customers.
Required:
1. Record the adjustment for uncollectible accounts at the end of the first war of operations using the 2% estimate of accounts receivable.
2. By the end of the second war, Previts has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Previts underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first war? Ignore tax effects.
3. Should Previts prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain.
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By the end of its first year of operations, Previts Corporation has credit sales of $750,000 and accounts receivable of $350,000. Given it’s the first year of operations, Previts’ management is unsure how much allowance for uncollectible accounts it should establish. One of the company’s competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 2% of ending accounts receivable, so Previts decides to use that same amount. However, actual write-offs in the following year were 25% of the $350,000 (= $87,500). Previts’ inexperience in the industry led to making sales to high credit risk customers.Required:1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 2% estimate of accounts receivable.2. By the end of the second year, Previts has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Previts underestimate…
By the end of its first year of operations, Previts Corporation has credit sales of $690,000 and accounts receivable of $290,000. Given it’s the first year of operations, Previts’ management is unsure how much allowance for uncollectible accounts it should establish. One of the company’s competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 2% of ending accounts receivable, so Previts decides to use that same amount. However, actual write-offs in the following year were 25% of the $290,000 (= $72,500). Previts’ inexperience in the industry led to making sales to high credit risk customers.
3. Should Previts prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts?
Yes
No
3. Grump Computer has credit sales of $400,000 in 2023 and a debit balance of $300 in the Allowance for
Doubtful Accounts at year end. As of December 31, 2023, $120,000 of accounts receivable remain
uncollected. The credit manager of Grump prepared an aging schedule of accounts receivable and
estimates that $5,200 will prove to be uncollectible.
On March 4, 2024 the credit manager authorizes a write-off of the $1,000 balance owed by A. Shard.
Required
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2023.
(b) Show the statement of financial position presentation of accounts receivable on December 31, 2023:
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $160,000
and the balance of Allowance for Doubtful Accounts is a credit of $4,000. Make the appropriate
entry to record the write-off of the Shard account. Also show the statement of financial position
presentation of accounts receivable before and after…
Chapter 5 Solutions
Financial Accounting
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- Martel Co. has 320,000 in Accounts Receivable on December 31, 20-1, the end of its first year of operations. The business is new, so it has no prior experience with uncollectible accounts. In Martels overall industry, the percentage of uncollectible accounts receivable is about 3%. For companies similar to Martel in size and operations, the percentage is about 5%. Martel decides to use the overall industry experience as the basis for its estimate of uncollectible accounts. Prepare the adjusting entry on December 31, 20-1 for Martel Co.s uncollectible accounts.arrow_forwardAt the end of 20-3, Martel Co. had 410,000 in Accounts Receivable and a credit balance of 300 in Allowance for Doubtful Accounts. Martel has now been in business for three years and wants to base its estimate of uncollectible accounts on its own experience. Assume that Martel Co.s adjusting entry for uncollectible accounts on December 31, 20-2, was a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts of 25,000. (a) Estimate Martels uncollectible accounts percentage based on its actual bad debt experience during the past two years. (b) Prepare the adjusting entry on December 31, 20-3, for Martel Co.s uncollectible accounts.arrow_forwardBy the end of its first year of operations, Previts Corporation has credit sales of $690,000 and accounts receivable of $290,000. Given it’s the first year of operations, Previts’ management is unsure how much allowance for uncollectible accounts it should establish. One of the company’s competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 2% of ending accounts receivable, so Previts decides to use that same amount. However, actual write-offs in the following year were 25% of the $290,000 (= $72,500). Previts’ inexperience in the industry led to making sales to high credit risk customers. 2. By the end of the second year, Previts has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Previts underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the…arrow_forward
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