Question

Using an Aging Schedule to Account for Bad Debts

Sparkle Jewels distributes fine stones. It sells on credit to retail jewelry stores and extends terms that require the stores to pay in 60 days. For accounts that are not overdue, Sparkle has found that there is a 90% probability of collection. For accounts up to one month past due, the likelihood of collection decreases to 75%. If accounts are between one and two months past due, the probability of collection is 60%, and if an account is over two months past due, Sparkle Jewels estimates only a 40% chance of collecting the receivable.

On December 31, 2016, the credit balance in Allowance for Doubtful Accounts is $11,500. The amounts of gross receivables by age on this date are as follows:

Category	Amount
Current	$195,000
Past due:
Less than one month	44,300
One to two months	24,800
Over two months	1,400

Required:

1. Prepare a schedule to estimate the amount of uncollectible accounts at December 31, 2016.

Sparkle Jewels
Aging Schedule to Account for Bad Debts
Category	Amount	Estimated Percent Uncollectible	Estimated Amount Uncollectible
Current	$195,000
Past due:
Less than one month	44,300
One to two months	24,800
Over two months	1,400
Totals	$265,500

2. On the basis of the schedule in part (1), prepare the journal entry on December 31, 2016, to estimate bad debts. Indicate the effect on financial statement items by selecting "–" for decrease (or negative effect), "+" for increase (or positive effect) and "NE" for No Entry (or no effect) on the financial statement.

Journal

Balance Sheet

Income Statement

Stockholders’

Net

Date

Description

Debit

Credit

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

2016

Dec. 31

3. Show how accounts receivable would be presented on the December 31, 2016, balance sheet.

Sparkle Jewels
Partial Balance Sheet
Current Assets

Answer 1

1. Schedule to estimate the amount of uncollectible accounts at December 31, 2016

Aging Schedule to Account for Bad Debts
Categoty	Amount $	Collection probability	Estimated Percent Uncollectible	Estimated Amount Uncollectible $
Current	195,000	90%	10%	19,500
Due Less than one month	44,300	75%	25%	11,075
Due One to two months	24,800	60%	40%	9,920
Due Over two months	1,400	40%	60%	840
Total				41,335
At the end of December 31, 2016, Balance in Allowance for Doubtful Accounts should be $ 41,335
There is existing credit balance of $ 11,500 , hence additional provisionof $ 29,835 should be created

2)

Journal Entries in the books of Sparkle Jewels for the year ended December 31, 2016
			Amount ($)
Date	Particulars	Debit	Credit
31-Dec-16	Bad Debts A/c .. Dr	29,835.00
	To Allowance for Doubtful A/c		29,835.00
	(41335-11500)
	Being additional provision made for bad debts

Bad Debts : Reflects $ 29,835 under Profit and loss account (Debit side)

Allowance for Doubtful Account: Reflects $ 41,335 under Current assets by reducing total accounts receivablle amount in balance sheet (Asset side)

Accounts Receivable: Reflects $ 2,65,500 under under Current assets after reducing allowance for doubtful debts amount in balance sheet (Asset side)

3)

Balance Sheet		As on
		31-Dec-16
Assets	Amount $	Amount $
Current Assets
Accounts Receivable		224,165
Outstanding for more than 180 days	-
Other receivables	265,500
	265,500
Allowance for Doubtful Debts	(41,335)