Question

Shamrock Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Shamrock's Accounts Receivable account was $585,400 and Allowance for Doubtful Accounts had a credit balance of $42,510. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding
Amount
Probability of
Collection
Less than 16 days $313,200 0.98
Between 16 and 30 days 112,600 0.90
Between 31 and 45 days 85,600 0.86
Between 46 and 60 days 42,400 0.81
Between 61 and 75 days 18,100 0.55
Over 75 days 13,500 0.00

Assume that accounts with a zero percent chance of collection are intended to be written off.

What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

Balance for Allowance for Doubtful Accounts $

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Show how accounts receivable would be presented on the balance sheet.

SHAMROCK CORPORATION
Balance Sheet (Partial)

Net Accounts Receivable
Accounts Receivable
Allowance for Doubtful Accounts
$

Add
Less
:

Accounts Receivable
Allowance for Doubtful Accounts
Net Accounts Receivable

Net Accounts Receivable
Accounts Receivable
Allowance for Doubtful Accounts
$

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What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Dollar effect of the year-end bad debt adjustment $


increase
decrease

Answer 1

A)

the appropriate balance for Allowance for Doubtful Accounts at year-end

Days Account Outstanding	Amount	Probability of Collection	Doubtful Accts:
0-15 days	$313,200	0.98	$6,264
16 - 30 days	112,600	0.90	11,260
31 - 45 days	85,600	0.85	12,840
46 - 60 days	42,400	0.80	8,480
61 - 75 days	18,100	0.55	8,145
Over 75 days	13,500	0.00
Balance for Allowance for Doubtful Accounts			$46,989

Balance for Allowance for Doubtful Accounts =$46,989

The accounts which have been outstanding over 75 days ($13,500) and have zero probability of collection would be written off immediately by a debit to Allowance for Doubtful Accounts for $13,500 and a credit to Amounts Receivable for $13,500 . It is not considered when determining the proper amount for the Allowance for Doubtful Accounts

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B)

Accounts Receivable would be presented on the balance sheet.

Accounts Receivable ($585,400 - $13,500)	$571,900
Less: Allowance for Doubtful Accounts	46,989
Accounts Receivable - Net		$524,911

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C)

What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

The year-end bad debt adjustment would decrease before-tax income $17,979 as computed below:

Estimated amount required in the Allowance for Doubtful Accounts	$46,989
Balance in the account after write-off of uncollectible accounts but        before adjustment ($42,510 - $13,500)	29,010
Required charge to expense	$17,979