Reference no: EM133205806
Swathmore Clothing Corporation grants its customers 30 days' credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.
At the end of 2020, accounts receivable were $574,000 and the allowance account had a credit balance of $54,000. Accounts receivable activity for 2021 was as follows:
Beginning balance $ 574,000
Credit sales 2,620,000
Collections (2,483,000)
Write-offs (68,000)
Ending balance $ 643,000
The company's controller prepared the following aging summary of year-end accounts receivable:
Summary
Age Group Amount Percent Uncollectible
0-60 days $430,000 4%
61-90 days 98,000 15
91-120 days 60,000 25
Over 120 days 55,000 40
Total $643,000
- What arguments would you make to the company president in favor of following the allowance method?
- Why is it a better choice than the direct write-off method?
- How can you convince the company president to follow your recommendation?