Question

Manilow Company 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 $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.

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

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

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

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

Answer 1

Answer : 1.) Calculation of Appropriate Balance for Alloeance for Doubtful Accounts at year end :

Below is the table showing calculation of Amount of Provision :

Days Accounts Outstanding	Amount	Probability of Uncollectible (1 - Probability of Collection)	Doubtful account balance
0-15	314700	0.02	6294
16-30	118900	0.1	11890
31-45	82800	0.14	11592
46-60	43900	0.21	9219
61-75	18200	0.48	8736
Over 75 days	15400	0	0
		Total	47731

The amount of 15400 over 70 days should be written off immediately and not considered while determing provision amount.

(2.) Accounts Receivable in Balance sheet :

Accounts Receivable Balance (593900 - 15400) = 578500

Less : allowance for Bad Debt = 47731

Accounts Receivable Net Balance = 530769

(3.) Calculation of  dollar effect of the year-end bad debt adjustment on the before-tax income :

Estimated amount in Provison for Bad Debt = 47731

Balance in the account after writing-off of bad accounts but before any adjustment is done (40480 - 15400) = 25080

Amount Required to charge in Expense = Estimated amount in Provison for Bad Debt - Balance in the account after writing-off of bad accounts but before any adjustment is done

= 47731 - 25080

= 22651