Compute the amount of the year end adjustment necessary

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Reference no: EM131144835

SEK Company sells office equipment and supplies to many organizations in the city and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. The number of customers taking the full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now taking the discount. Bad debts as a percentage of gross credit sales have risen from the 2.5% provided in past years to about 4.5% in the current year. The company's Finance Committee has requested more information on the collections of accounts receivable. The controller responded to this request with the report reproduced below. 

SEK COMPANY
Accounts Receivable Collections
May 31, 2010

The fact that some credit accounts will prove uncollectible is normal. Annual bad debts writeoffs have been 2.5% of gross credit sales over the past 5 years. During the last fiscal year, this percentage increased to slightly less than 4.5%. The current Accounts Receivable balance is $1,400,000. The condition of this balance in terms of age and probability of collection is as follows.

The Allowance for Doubtful Accounts had a credit balance of $29,500 on June 1, 2009. SEK has provided for a monthly bad debts expense accrual during the current fiscal year based on the assumption that 4.5% of gross credit sales will be uncollectible. Total gross credit sales for the 2009-10 fiscal year amounted to $2,900,000. Write-offs of bad accounts during the year totaled $102,000. 

Instructions

(a) Prepare an accounts receivable aging schedule for SEK Company using the age categories identified in the controller's report to the Finance Committee showing the following.

(1) The amount of accounts receivable outstanding for each age category and in total.

(2) The estimated amount that is uncollectible for each category and in total.

(b) Compute the amount of the year-end adjustment necessary to bring Allowance for Doubtful Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry to adjust the accounting records.

(c) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps SEK Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costsinvolved.  

Reference no: EM131144835

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