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Accounts Receivable

Watts Co. makes most of its sales on a credit basis. Watts uses the allowance method to account for credit losses. The company adjusts its accounts just once a year, at the December 31 year-end. Consider the following balances available from the companys unadjusted trial balance at year-end 2017:

Account	Debit	Credit
Accounts receivable	1,849,000
Allowance for doubtful accounts	16,290

Watts prepared an aging of accounts at year-end 2017, as follows:

Age Group	Amount	Estimated % Uncollectible
0-30 days	$1,013,540	1.2%
31-60 days	429,170	8.8%
61-90 days	194,630	19.3%
91-120 days	132,810	35.9%
Over 120 days	78,850	56.4%
	$1,849,000

On February 6, 2018, Watts wrote off a sizable receivable balance, amounting to $14,960. Later, on July 23, 2018, Watts received a check from this customer for $5,085 as partial payment on the past-due account.

4-Year Promissory Note

On December 31, 2017, Watts received a 4-year promissory note as consideration in an inventory sale transaction on that date. The note is noninterest-bearing, and it calls for the customer to pay the full face value of $21,696 on the December 31, 2021 maturity date. The going market rate of interest for comparable notes on the issue date was 7%.

3-Year Promissory Note

On that same date (December 31, 2017), Watts received a 3-year, 6%, $58,350 note from another customer as consideration in an inventory sale transaction. This note requires the customer to pay interest annually on December 31 (2018 through 2020). The going market rate of interest for comparable notes on the issue date was 11%.

Watts uses the effective-interest method to amortize premiums and discounts on all of its promissory notes.

Instructions

Address the following matters related to Watts Co.s accounts and notes receivable transactions:

Give the adjusting entry Watts must make on December 31, 2017 to account for estimated credit losses on its accounts receivable under each of the following two estimation approaches:

Watts estimates 9.3% of the year-end accounts receivable will not be collected.

Watts estimates credit losses from the aging schedule it prepared.

Give the entries Watts must make to record the 2018 events related to its accounts receivable:

The write-off on February 6, 2018.

The partial collection after write-off on July 23, 2018.

Give the entry to record Watts receipt of the 4-year promissory note on December 31, 2017.

Give the interest and collection entries Watts must make over the remaining term of the 4-year note (through December 31, 2021).

Give the entry to record Watts receipt of the 3-year promissory note on December 31, 2017.

Give the interest and collection entries Watts must make over the remaining term of the 3-year note (through December 31, 2020).

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