Question

Use the information below to answer the questions that follow.
Wiggins Corporation utilizes an accounting software package that is capable of producing a detailed aging of outstanding accounts receivable. Following is the aging schedule as of December 31, 20X2.
		AGE		AMOUNT OUTSTANDING
		0 to 30 days		$ 1,200,000
		31 to 60 days		700,000
		61 to 120 days		200,000
		Over 120 days		25,000
Casper Wiggins has owned and operated Wiggins Corporation for many years and has a very good sense of the probability of collection of outstanding receivables, based on an aging analysis. The following table reveals the likelihood of collection:
		AGE		PROBABILITY OF COLLECTION
		0 to 30 days		98%
		31 to 60 days		90%
		61 to 120 days		75%
		Over 120 days		50%
(a)	Prepare an aging analysis, and show how accounts receivable and the related allowance for uncollectibles should appear on the balance sheet at December 31.
(b)	Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $15,000 credit.
(c)	Prepare the necessary journal entry to update the allowance for uncollectibles, assuming the balance prior to preparing the aging was a $5,000 debit. How could the allowance account have contained a debit balance?

Answer 1

a. Prepare an aging analysis as follows:
	(a)	(b)	(c) = (a x b)	(a - c)
Age	Outstanding Amount	Probability of Collection	Collectible Amount	Uncollectible Amount
0 to 30 days	1200000	98%		24000
31 to 60 days	700000	90%		70000
61 to 120 days	200000	75%		50000
Over 120 days	25000	50%		12500
Total	2125000			156500
Accounts receivable and the related allowance for uncollectibles will appear on the balance sheet as follows:
Wiggings Corporation
Balance Sheet
December 31, 20x2
Assets
Current Assets:
Accounts receivable			2125000
Less: Allowance for Uncollectible Accounts			156500
Accounts receivable, net			1968500
b. Prepare the journal entry to update the allowance for uncollectibles as follows:
Date	Account Titles and Explanation			Debit	Credit
Dec. 31, 20x2	Bad Debt Expense ($156,500 - $15,000)			141500
	Allowance for Uncollectible Accounts				141500
c. Prepare the journal entry to update the allowance for uncollectibles as follows:
Date	Account Titles and Explanation			Debit	Credit
Dec. 31, 20x2	Bad Debt Expense ($156,500 + $5,000)			161500
	Allowance for Uncollectible Accounts				161500