Response to the following problem:
AICPA Adapted Correction of Allowance Account From inception of operations in 2007, Summit carried no allowance for doubtful accounts. Uncollectible receivables were expensed as written off, and recoveries were credited to income as collected. On March 1, 2011 (after the 2010 financial statements were issued), management recognized that Summit's accounting policy with respect to doubtful accounts was not correct, and determined that an allowance for doubtful accounts was necessary. A policy was established to maintain an allowance for doubtful accounts based on Summit's historical bad debt loss percentage applied to year-end accounts receivable. The historical bad debt loss percentage is to be recomputed each year based on the relationship of net write-offs to credit sales for all available past years up to a maximum of five years.
Information from Summit's records for five years is as follows:
|
Year
|
Credit
Sales
|
Accounts
Written Off
|
Recoveries
|
|
2007
|
$1,500,000
|
$15,000
|
$ 0
|
|
2008
|
2,250,000
|
38,000
|
2,700
|
|
2009
|
2,950,000
|
52,000
|
2,500
|
|
2010
|
3,300,000
|
65,000
|
4,800
|
|
2011
|
4,000,000
|
83,000
|
5,000
|
Accounts receivable balances were $1,250,000 and $1,460,000 at December 31, 2010 and December 31, 2011 respectively.
Required
1. Prepare the journal entry, with appropriate explanation, to set up the Allowance for Doubtful Accounts as of January 1, 2011. Disregard income taxes. Show supporting computations in good form.
2. Prepare a schedule analyzing the changes in the Allowance for Doubtful Accounts account for the year ended December 31, 2011. Show supporting computations in good form.