Ch. 7 Problems: P7-4

P7-4 (Bad-Debt Reporting) From inception of
operations to December 31, 2014, Fortner Corporation provided for uncollectible
accounts receivable under the allowance method. Provisions were made monthly at
2% of credit sales, bad debts written off were charged to the allowance
account; recoveries of bad debts previously written off were credited to the
allowance account, and no year-end adjustments to the allowance account were
made. Fortner’s usual credit terms are net 30 days.

The balance in Allowance for
Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit sales
totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of
credit sales, $90,000 of bad debts were written off, and recoveries of accounts
previously written off amounted to $15,000. Fortner installed a computer system
in November 2014, and an aging of accounts receivable was prepared for the
first time as of December 31, 2014. A summary of the aging is as follows.

Classification
by Month of Sale

Balance
in Each Category

Estimated
% Uncollectible

November–December 2014

$1,080,000

2%

July–October

650,000

10%

January–June

420,000

25%

Prior to 1/1/14

150,000

80%

$2,300,000

Based on the review of
collectibility of the account balances in the “prior to 1/1/14” aging category,
additional receivables totaling $60,000 were written off as of December 31,
2014. The 80% uncollectible estimate applies to the remaining $90,000 in the
category. Effective with the year ended December 31, 2014, Fortner adopted a
different method for estimating the allowance for doubtful accounts at the
amount indicated by the year-end aging analysis of accounts receivable.

Instructions

(a) Prepare a schedule
analyzing the changes in Allowance for Doubtful Accounts for the year ended
December 31, 2014. Show supporting computations in good form. (Hint: In
computing the 12/31/14 allowance, subtract the $60,000 write-off.)

(b) Prepare the journal entry for the year-end
adjustment to Allowance for Doubtful Accounts balance as of December 31, 2014.