7. Allowance method: analysis of receivables . At a January 2002 meeting, the pr

Question

7. Allowance method: analysis of receivables. At a January 2002 meeting, the presi­dent of Sonic Sound directed the sales staff %u201Cto move some product this year.%u201D The president noted that the credit evaluation department was being disbanded be­cause it had restricted the company%u2019s growth. Credit decisions would now be made by the sales staff. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

By the end of the year, Sonic had generated significant gains in sales, and the president was very pleased. The following data were provided by the accounting department:

The $12,444,000 receivables balance was aged as follows:

Explanation / Answer

5321* (1-.99) +3890(1-.9) + 1,067*(1-.8) +2,166*(1-.6)= 1,522

So the allowance for doubtful accounts should have 1,522,000 in it (assuming there we no writeoffs or recoveries in the year)

So the adjusting entry should be

DR Bad Debt expense    1,499,000

     CR Allowance for doubtful accounts   1,499,000

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