Question
In: Accounting
Drumpf suppy has the following accounts receivable aging schedule as at december 31,2015. Accounts receivable Age...
Drumpf suppy has the following accounts receivable aging schedule as at december 31,2015.
| Accounts receivable Age | Amount | proportion expected to dedaulf | allowance required |
| current | $150,000 | 0.5% | |
| 1-30 days past due | $65,000 | 1.0% | |
| 31-45 days past due | $16,500 | 13.0% | |
| 46-90 days past due | $4,500 | 20.0% | |
| 91-135 days past due | $3,000 | 25.0% | |
| over 135 days past due | $1,500 | 60.0% |
The balance in drumpf's allowance for doubtful accounts at the beginning of the year is $6,000(credit). During the year, accounts in the total amount of $4,500 were writeen off.
1.use formulas to calculate the allownace required for each line and the total allowance requied.
2.based on aging of receivables, the bad debit expense is___ (build the bad debt expense equation)
3. prepare the journal entry for bad debt expense
4.determine the bad debt expense using the percentafe of credit sales method at 1.5%. Credit sales for the year are $493,000. And prepare the journal entry for bad expense
5. Which method will result in the higher net income for the company?
Which method would a for-profit company probably prefer in these circumstance?
Please explain.
Solutions
Expert Solution
| Accounst receivable Aging | Amount | % Expected of default | Allowance required | ||||||
| Current | 150000 | 0.50% | 750 | ||||||
| 1-30 days | 65000 | 1% | 650 | ||||||
| 31-45 days | 16500 | 13% | 2145 | ||||||
| 46-90 days | 4500 | 20% | 900 | ||||||
| 91-135 days | 3000 | 25% | 750 | ||||||
| Over 135 days | 1500 | 60% | 900 | ||||||
| Allowance Ending balance | 6095 | ||||||||
| Part-1 | |||||||||
| Allowance for Doubtful Debts | 6000 | ||||||||
| Less: Bad debts written off | 4500 | ||||||||
| Balance left | 1500 | ||||||||
| Balance Ending to be maintained | 6095 | ||||||||
| Bad debts expense based on Ageing of receivables | 4595 | ||||||||
| Journal entry: | |||||||||
| Bad debts expense Dr. | 4595 | ||||||||
| Allowance for doubtful debts | 4595 | ||||||||
| Part-2 | |||||||||
| Bad debts expense: | Net credt sales * | Percentage of bad debts expense | |||||||
| Bad debts expense: | $ 493,000 * | 1% = | $4,930 | ||||||
| Bad debts expense based on Percent of sales method | $4,930 | ||||||||
| Journal entry: | |||||||||
| Bad debts expense Dr. | 4930 | ||||||||
| Allowance for doubtful debts | 4930 | ||||||||
| Part-3 | |||||||||
| Allowance based on Aging of Accounts receivable methos results in higher income. | |||||||||
| Method based on aging of accounts receivable is probably prefered over toher method due to the reason that it is based on more realistic assumption that the accounts receivable whose aging is higher is having more risk of realisable. Hence, need more provision. | |||||||||
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