The Cormier Corporation sells office equipment and supplies to many organizations in the city and surrounding area
Question:
The controller responded to a request for more information on the deterioration in collections of accounts receivable by preparing the following report:
THE CORMIER CORPORATION
Finance Committee Report-Accounts Receivable Collections
May 31, 2014
The fact that some credit accounts will prove uncollectible is normal. Annual bad debt writeoffs have been 1.5% of gross credit sales over the past five years. During the last fiscal year, this percentage increased to s lightly less than 4%. The current Accounts Receivable balance is $1.6 million. The condition of this balance in terms of age and probability of collection is as follows:
Allowance for Doubtful Accounts had a credit balance of $43,300 on June 1, 2013. The Cormier Corporation has provided for a monthly bad debt expense accrual during the current fiscal year based on the assumption that 4% of gross credit sales will be uncollectible. Total gross credit sales for the 2013-14 fiscal year amounted to $4 million. Write-offs of bad accounts during the year totalled $145,000.
Instructions
(a) Prepare an accounts receivable aging schedule for the Cormier Corporation using the age categories identified in the controller's report to the finance committee. Show
(l) The amount of accounts receivable outstanding for each age category and in total, and
(2) The estimated amount that is uncollectible for each category and in total.
(b) Calculate the amount of the year-end adjustment that is needed to bring Allowance for Doubtful Accounts to the balance indicated by the aging analysis. Then prepare the necessary journal entry to adjust the accounting records.
(c) Assuming that the economy is currently in recession, with tight credit and high interest rates:
l. Identify steps that the Cormier Corporation might consider to improve the accounts receivable situation.
2. Evaluate each step you identify in terms of the risks and costs that it involves.
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Step by Step Answer:
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,