Problem $5-7$B $($Algo$)$ Underestimating future Journal entry worksheet

Record the adjusting entry for uncollectible accounts.

Note: Enter debits before credits.

uncollectible accounts $($LO$5-3,5-4)$

By the end of its first year of operations, Pickney Corporation has credit

sales of $$550,000$ and accounts receivable of $$150,000.$ Given it's the

first year of operations, Pickney's 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 $3\%$ of ending

accounts receivable, so Pickney decides to use that same amount.

However, actual write$-$offs in the following year were $15\%$ of the

$$150,000(=$ $$22,500).$ Pickney's inexperience in the industry led to

making sales to high credit risk customers.

Required:

Record the adjusting entry for uncollectible accounts at the end of

the first year of operations using the $3\%$ estimate of accounts

receivable.

By the end of the second year, Pickney has the benefit of hindsight

to know that estimates of uncollectible accounts in the first year were

too low. By how much did Pickney 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

year? Ignore tax effects.

Should Pickney prepare new financial statements for the first year of

operations to show the correct amount of uncollectible accounts?