30 Minutes Medium  

PROBLEM 7.4A
WILCOX MILLS
         
a.
General Journal
         
2005    
Var.* Allowance Allowance for Doubtful 165,000  
for Doubtful Accounts
Accounts

      Accounts   165,000
Receivable

    Entry summarizing the    

write-off of receivables
    throughout the year.    
       
Var.* Accounts Receivable 15,000  
      Allowance for   15,000
Doubtful
Accounts

    Entry summarizing the

reinstatement of accounts
    proving to be collectible.  
           
Var.* Cash 15,000
      Accounts   15,000
Receivable

    Entry summarizing the  

collection of accounts
reinstated.
     
Dec 31 Uncollectible Accounts 160,000
Expense
      Allowance for   160,000
Doubtful
Accounts

    To adjust allowance for  

doubtful accounts to
  $90,000 credit balance:  
Balance at Dec. 31, 2004 $ 80,000
    Less: Write-offs during (165,000)
2005
    Add: Accounts reinstated 15,000  
    Unadjusted balance (70,000)  
(debit balance)
    Desired balance (credit) 90,000  
  Required adjustment ########  
($70,000 + $90,000)
       
       
       
           
*The first three entries summarize entries occurring at various dates throughout the
year.
           
b. A case can probably be made that the allowance is unreasonably low.
  The amount of the allowance at the end of 2004 was $80,000, but
  $165,000 were written off during the following year which may imply
  that the allowance should have been higher. A counter argument, which
may justify the $80,000 balance, is that the allowance at the end of a year
 
is not necessarily intended to provide for all accounts that will be written
  off during the coming year. Rather, it represents only the portion of the
  receivables existing at year-end estimated to be uncollectible.
           
  As Wilcox Mills sells on 30-day terms, it should turn over its receivables
  about 12 times each year. Thus, the year-end receivables should equal
  only about 112 of a year’s credit sales, and the balance in the allowance
  should provide for about 112 of the accounts written off during the year.