Question

Ch 7 E7-9, E7-10

Daley Company prepared the following aging of receivables analysis at December 31.

				Days Past Due
	Total			0			1 to 30				31 to 60				61 to 90				Over 90
Accounts receivable	$	570,000		$	396,000			$	90,000			$	36,000			$	18,000			$	30,000
Percent uncollectible					1	%			2	%			5	%			7	%			10	%

a. Estimate the balance of the Allowance for Doubtful Accounts assuming the company uses 4.5% of total accounts receivable to estimate uncollectibles, instead of the aging of receivables method.
b. Prepare the adjusting entry to record Bad Debts Expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $12,000 credit.
c. Prepare the adjusting entry to record bad debts expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $1,000 debit.

Estimate the balance of the Allowance for Doubtful Accounts assuming the company uses 4.5% of total accounts receivable to estimate uncollectibles, instead of the aging of receivables method.

Answer 1

a. The estimated Allowance for Doubtful Accounts on the basis of total Account Receivable @4.50% is $25,650

Calculation:

Particulars	Total
Accounts Receivable	5,70,000
% Uncollectible	4.5%
Amount Uncollectible (Formula)	(Accounts Receivable X % Uncollectible) = (570000 X 4.50%)
Amount Uncollectible (Amount)	25,650

b. Allowance for Doubtful Accounts as calculated above = $25,650 credit balance

Unadjusted Balance of Allowance for Doubtful Accounts = $12,000 credit balance

Balance of Allowance for Doubtful Accounts needed to be created = Total Allowance required - Allowance already created = $25,650 - $12,000 = $13,650 credit balance

An equivalent amount of Bad Debt expense would be debited as the Allowance for Doubtful Accounts i.e. $13,650.

Entry:

Bad Debts Expense A/c Dr. $13,650

To Allowance for Doubtful Accounts $13,650

(Being Allowance for Doubtful Accounts created @4.5% of total accounts receivable)

c. Allowance for Doubtful Accounts as calculated above = $25,650 credit balance

Unadjusted Balance of Allowance for Doubtful Accounts = $1,000 debit balance

Balance of Allowance for Doubtful Accounts needed to be created = Total Allowance required + Allowance already created (since the allowance is debit balance, hence needs to be added to total allowance in order to reflect total balance) = $25,650 + $1,000 = $26,650 credit balance

An equivalent amount of Bad Debt expense would be debited as the Allowance for Doubtful Accounts i.e. $26,650.

Entry:

Bad Debts Expense A/c Dr. $26,650

To Allowance for Doubtful Accounts $26,650

(Being Allowance for Doubtful Accounts created @4.5% of total accounts receivable)