Question

Metlock Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Metlock's Accounts Receivable account was $592,400 and Allowance for Doubtful Accounts had a credit balance of $44,820. 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 $315,900 0.97
Between 16 and 30 days 116,800 0.90
Between 31 and 45 days 81,900 0.85
Between 46 and 60 days 42,400 0.79
Between 61 and 75 days 21,700 0.53
Over 75 days 13,700 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.

METLOCK CORPORATION
Balance Sheet (Partial)

Net Accounts Receivable
Accounts Receivable
Allowance for Doubtful Accounts
$

Add
Less
:

Accounts Receivable
Allowance for Doubtful Accounts
Net Accounts Receivable

Accounts Receivable
Allowance for Doubtful Accounts
Net Accounts Receivable
$

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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

1.

Days Outstanding	Receivable	Probability of Collection	Doubtful Collection (Receivable*(1-Prob of collection)
Less than 16 Day	315900	97%	9477
Between 16 and 30 days	116800	90%	11680
Between 31 and 45 days	81900	85%	12285
Between 46 and 60 days	42400	79%	8904
Between 61 and 75 days	21700	53%	10199
Over 75 Days	13700	0%
Balance for Allowance of Doubtful Account			52545
$13700 will be written off immediately reducing receivable balance and Allowance balance as it has 0% probability of collection

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

Account receivable (592400-13700)	578700
Less: Allowance of Doubtful Balance	52545
Account Receivable Net		526155

3. Dollar effect of the year-end bad debt adjustment $

Amount estimated as Doubtful Account Allowance Balance	52545	Calculated in Part - 1
Actual Balance after Write off of 13700 (44820-13700)	31120
Expense to be shown in PnL i.e. Effect of bad debt	21425
This year end adjustment will Decrease income by $ 21425