Jacobian Steel Manufacturing sells bulk steel products for maritime construction
ID: 2395750 • Letter: J
Question
Jacobian Steel Manufacturing sells bulk steel products for maritime construction. The company has used the allowance method for estimated bad debts for several years. Specifically they estimate that 6% of credit sales will go bad each year. Over the past several years, Jacobian has seen that year-end allowance account has a debit balance before adjustment. The company wants an in-depth analyzes of bad debts and a determination as to which method to use. You have been hired to perform the study. During your review of their financial records, the following data becomes available Year Total Sales % on credit 2010 2011 2012 $1,000,000 $1,800,000 $2,000,000 60% 70% 75% Year Bad debts written off 2010 2011 2012 $52,000 $96,000 $60,000 Allowan Year Balance 2010 2011 2012 $6,000 S42,000 $12,000 Aging of Accounts Receivable: 0
Explanation / Answer
a) Total sales % of credit sales credit sales C Bad debt expenses B (6%*C) Allowance bal before adjustment A (dr bal) Allowance bal after adjustment B-A 2010 $1,000,000 60% $600,000 $36,000 $6,000 $30,000 2011 1800000 70% $1,260,000 $75,600 42000 $33,600 2012 2000000 75% $1,500,000 $90,000 12000 $78,000 b) Aging method Accounts recievable % uncollectible uncollectibel amt Not due $250,000 6% $15,000 1-30 pats due 110000 15% $16,500 31-60 140000 20% $28,000 61-90 90000 30% $27,000 Over 90 days 40000 60% $24,000 $110,500 For 2012 the Bad debt expense will be $110500+12000 $122,500 c) % of Accounts receivable The ending balance of allowance for doubtful debts must be 12% of accounts receivable Accounts receivable bal D % Allowance bal after adjustment C=D*12% Allowance bal before adjustment A (dr bal) Bad debt expenses A+C 2010 $365,000 12% $43,800 $6,000 $49,800 2011 425000 12% $51,000 42000 $93,000 2012 630000 12% $75,600 12000 $87,600 The best method is aging method as it give the correct bad debt expenses because it takes in account the % of uncollectible accounts on the no. of days past due. So when there are more past due days more the chances of bad debts and vice versa
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