Wilcox Mills is a manufacturer that makes all sales on 30-day credit terms. Annual sales are approximately $30 million. At the end of 2010, accounts receivable were presented in the company’s balance sheet as follows:
Accounts receivable from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,100,000
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
During 2011, $165,000 of specific accounts receivable were written off as uncollectible. Of these accounts written off, receivables totaling $15,000 were subsequently collected. At the end of 2011, an aging of accounts receivable indicated a need for a $90,000 allowance to cover possible failure to collect the accounts currently outstanding.
Wilcox Mills 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 $15,000 in accounts receivable that were subsequently collected.
3. The adjusting entry required at December 31, 2011, to increase the Allowance for Doubtful Accounts to $90,000.
b. Notice that the Allowance for Doubtful Accounts was only $80,000 at the end of 2010, but uncollectible accounts during 2011 totaled $150,000 ($165,000 less the $15,000 reinstated).
Do these relationships appear reasonable, or was the Allowance for Doubtful Accounts greatly understated at the end of 2010? Explain.