Question

Brown Cow Dairy uses the aging approach to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three time periods as follows: (1) 1–30 days old, $12,000; (2) 31–90 days old, $5,000; and (3) more than 90 days old, $3,000. For each age group, the average loss rate on the amount of the receivable due to uncollectibility is estimated to be (1) 5 percent, (2) 10 percent, and (3) 20 percent, respectively. At December 31 (end of the current year), the Allowance for Doubtful Accounts balance was $800 (credit) before the end-of-period adjusting entry is made. Required: Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts. What amount of Bad Debt Expense should be recorded on December 31? If the unadjusted balance in the Allowance for Doubtful Accounts was a $600 debit balance, what amount of Bad Debt Expense should be recorded on December 31?

Answer 1

Solution and Explanation:

Age of the     Amount             Estimated                    Estimated

Receivables             Uncollectibles  Uncollectible Amounts    

1-30 days old    $12,000   3%                            $360

31-90 days old   $5,000   15%                              $750

more than 90

days old               $3,000   30%                     $900

Estimated year end Balances for Uncollectible Amounts   $2,010

Bad Debt Expense for the year : Estimated Uncollectible Amount - Existing Credit Balance in the Allowance Account

Bad Debt Expense : $2,010 minus $800 = 1210

If the existing balance is Debit Balance of $600.

Bad Debt Expense : $2,010 plus 600 = $2,610.