Question

A company uses the analysis of receivables method by aging its accounts receivable. Based on the following information, answer questions a) and b) below. Age Interval Balance Percent Uncollectible Not past due $865,000 1% 1-30 days past due 110,000 2% 31-90 days past due 65,000 15% 91-180 days past due 42,000 60% over 180 days past due 15,000 90% (a) Calculate an estimate of what the allowance for doubtful accounts balance should be at fiscal year end (3 points). (b) Assuming the allowance for doubtful accounts has a credit balance of $6,500 prior to adjustment, determine the appropriate adjusting entry necessary to adjust uncollectibles at fiscal year end (3 points)

Answer 1

Answer:

(a) The estimate of what the allowance for doubtful accounts balance is $59,300.

(b) The appropriate entries, if allowance for doubtful accounts has a credit balance of $6,500 prior to adjustment, will be:

Debit Bad debt expense ($59,300 - $6,500)           $52,800

Credit Allowance for doubtful accounts                    $52,800

(To record bad debt expense)

Explanation:

Age Interval                          Balance  Percent Uncollectible  Bad debt expense

Not past due                      $865,000             1%                              $8,650

1-30 days past due                110,000             2%                               2,200

31-90 days past due              65,000            15%                               9,750

91-180 days past due             42,000           60%                            25,200

Over 180 days past due         15,000           90%                              13,500

Total                                 $1,097,000                                             $59,300

• The aging of accounts receivable above was used in determining the bad debt expense by multiplying the percentage that is deemed uncollectible by the balance in accounts receivable.
• If the allowance for doubtful accounts has a credit balance of $6,500, the adjustment to bad debt expense required will be $59,300 - $6,500 = $52,800.