Problem 7-3 (bad-debt reporting - Aging). Manilow Corporation ope rates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow's AR account was $555,000 and the Aloowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below. Days Account Outstanding Amount Probability of Collection Less than 16 days $300,000 .98 Between 16 and 30 days 100,000 .90 Between 31 and 45 days 80,000 .85 Between 46 and 60 days 40,000 .80 Between 61 and 75 days 20,000 .55 Over 75 days 15,000 .00 Instructions: a)What is the appropriate balance for the Allowance for Doubtful Accounts at year-end? b) Show how AR would be presented on the balance sheet. c)What is the dollar effect of the year-end bad debt adjustment on the before-tax income? (a)
The Allowa Allowance nce for Doubtf Doubtful ul Accoun Accounts ts should should have have a bala balance nce of $45,00 $45,000 0 at yearyearend. The supporting calculations are shown below: Expected
Days Account Outstanding
Percentage Amount
Estimated Uncollectible
Uncollectible
0–15 days
$300,000
.02
$ 6,000
16–30 days
100,000
.10
10,000
31–45 days
80,000
.15
12,000
46–60 days
40,000
.20
8,000
61–75 days
20,000
.45
9,000
Balance for Allowance for Doubtful Accounts
$45,000
The accounts which have been outstanding over 75 days ($15,000) and have zero zer o probab probabili ility ty of collecti collection on would would be writte written n off immediat immediately ely by a debit to Allowa Allowanc ncee for for Doubtf Doubtful ul Accou Accounts nts for for $15,0 $15,000 00 and and a credi creditt to Accoun Accounts ts Receivable for $15,000. It is not considered when deter-mining the proper amount for the Allowance for Doubtful Accounts. (b) (b)
Acc Accounts receivabl able ($5 ($55 55,00 ,000 – $1 $15,00 ,000).... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
$540,0 0,000
Less: ess: Allo Allowa wanc ncee for for doub doubtf tful ul acco accoun unts ts.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
45,0 45,000 00
Acco Accoun unts ts rece receiv ivab able le (net (net). )... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ...... .....
$495 $495,0 ,000 00
(c)
Thee yearTh year-en end d bad deb debtt adjust adjustme ment nt would would dec decre rease ase befo before re-ta -tax x income income $20 $20,00 ,000 0 as computed below: Estimated amount required in the Allowance for for Dou Doubt btfu full Acco Accoun unts ts.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
$45, $45,00 000 0
Balance in the account after write-off of uncollectible accounts accounts but before adjustment adjustment ($40,000 – $15,000)................................. $15,000)............................. ....
25,000
Requ Requir ired ed char charge ge to expe expens nse. e... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..
$20, $20,00 000 0
Problem 7-6 The balance sheet of Starsky Company at December 31, 2010, includes the following. Notes receivable$36,000 Accounts receivable182,100 Less: Allowance for doubtful accounts 17,300200,800 Transactions in 2010 include the following. 1.Accounts receivable of $318,000 were collected including accounts of $60,000 on which 2% sales discounts were allowed. 2.$5,300 was received in payment of an account which was written off the books as worthless in 2010. (Hint: Reestablish the receivable account) 3.Customer accounts of $17,500 written off during the year. 4.At year-end the Allowance for Doubtful Accounts was estimated to need a balance of $20,000. this estimate is based on an analysis of aged accounts receivable. Instructions Prepare all journal entries necessary to reflect the transactions above
–1– Cash. Cash..... ....... ...... ....... ....... ....... ....... ...... ....... ....... ...... ....... ....... ...... ....... ....... ....... ....... ...... ....... ....... ...... ....... ....... ...... ....... ........ ........ ......... .....
136,80 136,800* 0*
Sale Saless Disc Discou ount nts. s... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... .... ..... ..... .... .... ..... ...... ...... ...... ...... ...... ...... ..... ..
1,20 1,200 0
Accounts Receivable...............................................................
138,000
*[$138,000 – ($60,000 X 2%)] –2– Acco Accoun unts ts Rece Receiv ivab able le.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
5,30 5,300 0
Allowance for Doubtful Accounts..........................................
Cash Cash... ..... .... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... .... ..... ..... ..... ...... ...... ...... ... Accounts Receivable...............................................................
–3–
5,300
5,30 5,300 0 5,300
Allo Allowa wanc ncee for for Doub Doubtf tful ul Acco Accoun unts ts.. .... ..... ..... .... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ...
17,5 17,500 00
Accounts Receivable...............................................................
17,500
–4– Bad Bad Debt Debt Expe Expens nse. e... .... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... ..... ..... .... .... .... ..... ..... .... .... ..... ...... ...... ...... ...... ...... ...... ..... .. Allowance for Doubtful Accounts.......................................... *($17,300 + $5,300 – $17,500 = $5,100; $20,000 – $5,100 = $14,900)
14,9 14,900 00 14,900*
