Question

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow's Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000. 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		$300,000			0.98
Between 16 and 30 days		100,000			0.90
Between 31 and 45 days		80,000			0.85
Between 46 and 60 days		40,000			0.80
Between 61 and 75 days		20,000			0.55
Over 75 days (to be written off )		15,000			0.00

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

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

MANILOW CORPORATION Balance Sheet (Partial)
Allowance for Doubtful Accounts
Net Account Receivable
Account Receivable

c.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 or decrease)

Answer 1

Part A

Days Account Outstanding	amount	Expected Percentage Uncollectible	Estimated Uncollectible
0-15 days	$300,000	0.02 (1-0.98)	6000
16-30 days	100000	0.10 (1-0.90)	10000
31-45 days	80000	0.15 (1-0.85)	12000
46-60 days	40000	0.20 (1-0.80)	8000
61-75 days	20000	0.45 (1-0.55)	9000
Balance for Allowance for Doubtful Accounts			$45000

As outstanding receivables over 75 days ($15,000) and have 0% probability of collection, so are required to be written off immediately. Therefore they are not considered for calculating the amount of the Allowance for Doubtful Accounts.

Part B

Accounts Receivable (300000+100000+80000+40000+20000)	540000
Less: Allowance for Doubtful Accounts	45000
Net Accounts Receivable	$495000

Part C

The year-end bad debt adjustment would decrease the year’s before-tax income by $20000

Estimated amount required in the Allowance for Doubtful Accounts	45000
Balance in the account after write-off of bad accounts but before adjustment (40000-15000)	25000
Required charge to expense	$20000