Question

Kingbird Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Kingbird's Accounts Receivable account was $593,900 and Allowance for Doubtful Accounts had a credit balance of $40,480. 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		$314,700			0.98
Between 16 and 30 days		118,900			0.90
Between 31 and 45 days		82,800			0.86
Between 46 and 60 days		43,900			0.79
Between 61 and 75 days		18,200			0.52
Over 75 days (to be written off )		15,400			0.00

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

Balance for Allowance for Doubtful Accounts

$

eTextbook and Media

  

  

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

KINGBIRD CORPORATION Balance Sheet (Partial)
Accounts ReceivableAllowance for Doubtful AccountsNet Accounts Receivable			$
AddLess:                                                                       Allowance for Doubtful AccountsAccounts ReceivableNet Accounts Receivable
Accounts ReceivableAllowance for Doubtful AccountsNet Accounts Receivable			$

eTextbook and Media

  

  

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

$                                                                        decreaseincrease

show work and explain

Answer 1

• Working

			Probability of	Amount estimated to be uncollectible
Days Account Outstanding		Amount	Collection
		[A]	[B]	[C = A - (A x B)]
Less than 16 days		$314,700	98.00%	$6,294
Between 16 and 30 days		$118,900	90.00%	$11,890
Between 31 and 45 days		$82,800	86.00%	$11,592
Between 46 and 60 days		$43,900	79.00%	$9,219
Between 61 and 75 days		$18,200	52.00%	$8,736
Over 75 days (to be written off )		$15,400	0.00%	$15,400
		$593,900		$63,131

• [1]

Balance for Allowance for Doubtful accounts = $ 63,131 [Credit]

• [2]

KINGBIRD CORPORATION
Balance Sheet (Partial)
Accounts Receivable		$593,900
Less:	Allowance for Doubtful Accounts	$63,131
Net Accounts Receivable		$530,769

• [3]

Bad Debt Expense = $ 63131 – 40480 = $ 22,651
Dollar effect of the year end bad debt adjustments = $ 22,651 DECREASE.