Following are the monthly credit sales, collections and bad debt write-offs for
ID: 2342153 • Letter: F
Question
Following are the monthly credit sales, collections and bad debt write-offs for Clarion Distributing, Inc. for its second quarter ending July 31, 2018. Month May June July CollectionsWrite-Offs 1,000 Sales S 87,500 S 95,000 81,000 95,000 05,000 S 290,500 S 281,000 108,000 3,500 Total Clarion's controller prepared the following aging of accounts receivable as of July 31, 2018: Account Classification Current 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Balance $50,000 37,000 18,000 1,000 5,000 Percent Uncollectable 1% 5% 10% 20% 50% The allowance for doubtful accounts balance on April 30, 2018 was $8,950. Payments for credit sales are due 30 days from the date of sale. uired: Clarion uses the accounts receivable aging, and an analysis of specific overdue accounts to determine the allowance for doubtful accounts. The over 90 days past due category includes a $3,000 receivable from a customer undergoing liquidation. Clarion estimates that it will collect only 10% of the balance due. 1. Prepare any adjusting journal entriesExplanation / Answer
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annual accounts receivable turnover ratio = Net credit sales / accounts receivable = $ 290,500 / 111,000 = 2.62
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It seems the company has followed up latest sales of july month but still has o/s for the month of june - company should target the old due sales first for collections which will reduce the provision required as at the balance sheet date also.
Ageing Balance ECL % Provision as per ECL (Expected Credit loss model) Current $ 50,000.00 1% $ 500.00 1-30 days $ 37,000.00 5% $ 1,850.00 31-60 days $ 18,000.00 10% $ 1,800.00 61-90 days $ 1,000.00 20% $ 200.00 over 90 days due $ 5,000.00 50% $ 2,500.00 Total Provision $ 6,850.00 Specific provision required for customer undergoing liquidation ($3000 x 90%) $ 2,700.00 Total Provision required as at 7/31/18 $ 9,550.00 Total Provision in books as at 7/31/18 ($8950-4500) $ 4,450.00 Adjusting journal entry required $ 5,100.00 Entry: Allowance for doubtful a/c (P&L) $ 5,100.00 To Provision for doubtful debt a/c (BS) $ (5,100.00) 2. Balance Sheet 4/30/2018 7/31/2018 Debtors xxx xxx Less : provision for doubtful debts ($8,950) ($9,550) xxx xxx Income statement For the QE 7/31/2018 Provision for bad debts $ 5,100.00 Cash flow under indirect method: Profit as per Income statement xxx Add: provision for doubtful debts $ 5,100.00 Cash flow under direct method: Collections from debtors $ 281,000.00