Question

Zillmann Company sells goods on credit and estimates bad debts as a percentage of Account receivable, the credit period is 30 days .The Company has three customers following are the details of the Receivables at Dec-31, 2017 from these customers and the respective date when sales were made.

Name of customers	Date of Sales	Account Receivables
Alexander	Nov-01,2017	$ 10,000
	Dec-15,2017	$ 12,000
Blair	Sep-10,2017	$ 16,000
	Oct-25,2017	$ 41,000
Chase	Aug-15,2017	$ 40,000

Required:

1. Which approach of recording bad debts is used by company?
2. Prepare aging schedule for Zillmann Company on Dec-31, 2017 in the format given below.

Name of Customer	Total	Not Yet     due	1--30 Past due	31--60 Past due	61--90 Past due	Over 90 days
Bad debt %		3%	6%	13%	25%	60%

Calculate the estimated amount of bad debt by applying the percentage given in the above table.

4. Record the bad debt expense on Dec-31, 2017, assume allowance for bad debts has a debit balance of

$ 15,000 at this date.

5.    Assume on Mar-15, 2018 Blair, declared bankrupt, Record this default in the books of Zilmann.
6.    Do you think Zilmann can use direct write off approach to record bad debts, Max two lines.

Answer 1

Solution :

PART A: Method of recording bad debts followed by the company :

Accounts Receivable Method

PART B : Ageing Schedule

Estimated amount of bad debts = $34,290

Part A : Recording bad debts expense

Bad Debt Expense = Estimated amount of bad debts + Existing debit balance in allowance for doubtful accounts

= $34,290 + $15,000

= $49,290

Profit & Loss account	$49,290
To Allowance for Doubtful debts	$49,290

Entry to write off accounts receivable when a customer files for bankruptcy :
Allowance for Doubtful debts	$                   15,000
To Accounts receivable - Blair	$                15,000

Part B : Using Direct Method to write off bad debt

Under this method, no entry for the allowance of bad debts is maintained, the bad debts is written off as expense as and when incurred. It is not advisable for Zilmann to follow this method because, this method is a violation of the principles given by the GAAP.