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Aging of Receivables; Estimating Allowance for Doubtful Accounts Wig Creations Company supplies wigs and hair care...

Aging of Receivables; Estimating Allowance for Doubtful Accounts

Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 20Y1:

Days Past Due
Customer Balance Not Past Due 1-30 31-60 61-90 91-120 over 120
Subtotals 653,400 362,600 156,800 71,900 24,200 21,600 16,300

The following accounts were unintentionally omitted from the aging schedule:

Customer Due Date Balance
Arcade Beauty May 28, 20Y1 $2,700
Creative Images Sept. 7, 20Y1 5,700
Excel Hair Products Oct. 17, 20Y1 800
First Class Hair Care Oct. 24, 20Y1 1,900
Golden Images Nov. 23, 20Y1 600
Oh The Hair Nov. 29, 20Y1 3,200
One Stop Hair Designs Dec. 2, 20Y1 2,100
Visions Hair and Nail Jan. 5, 20Y2 6,900

Wig Creations has a past history of uncollectible accounts by age category, as follows:

Age Class Percent Uncollectible
Not past due 2 %
1-30 days past due 4
31-60 days past due 10
61-90 days past due 15
91-120 days past due 35
Over 120 days past due 75

Required:

1. Determine the number of days past due for each of the preceding accounts. If an account is not past due, enter a zero.

Customer Due Date Number of Days Past Due
Arcade Beauty May 28, 20Y1 days
Creative Images Sept. 7, 20Y1 days
Excel Hair Products Oct. 17, 20Y1 days
First Class Hair Care Oct. 24, 20Y1 days
Golden Images Nov. 23, 20Y1 days
Oh The Hair Nov. 29, 20Y1 days
One Stop Hair Designs Dec. 2, 20Y1 days
Visions Hair and Nail Jan. 5, 20Y2 days

2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals. If an amount box does not require an entry, leave it blank.

Wig Creations Company
Aging of Receivables Schedule
December 31, 20Y1
Customer Balance Not Past Due Days Past Due 1-30 Days Past Due 31-60 Days Past Due 61-90 Days Past Due 91-120 Days Past Due Over 120
Subtotals
Arcade Beauty
Creative Images
Excel Hair Products
First Class Hair Care
Golden Images
Oh The Hair
One Stop Hair Designs
Visions Hair and Nail
Total
Percent uncollectible 2% 4% 10% 15% 35% 75%
Estimate of uncollectible accounts

3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.
$

4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $1,730 before adjustment on December 31, 20Y1. Journalize the adjustment for uncollectible accounts.

Bad Debt Expense
Allowance for Doubtful Accounts

5. Assume that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?

On the balance sheet, assets would be overstated  by $47,426  because the allowance for doubtful accounts would be understated  by $47,426 . In addition, the owner’s capital account would be overstated  by $47,426  because bad debt expense would be understated  and net income overstated  by $47,426  on the income statement.

Solutions

Expert Solution

1.

Customer Due Date Number of Days Past Due
Arcade Beauty May 28 20Y1 217
Creative Images Sep 7, 20Y1 115
Excel Hair Products Oct 17, 20Y1 75
First Class Hair Care Oct 24, 20Y1 68
Golden Images Nov 23, 20Y1 38
Oh the Hair Nov 29, 20Y1 32
One Stop Hair Dsigns Dec 2, 20Y1 29
Visions Hair and Nail Jan 5, 20Y2 Not Past Due

2.

Wig Creations Company
Ageing Schedule of Receivables
December 31, 20Y1
Customer Balance Not Past Due 1-30 days Past Due 31-60 days Past Due 61-90 days Past Due 91-120 days Past Due Over 120 days Past Due
Subtotals 653,400 362,600 156,800 71,900 24,200 21,600 16,300
Arcade Beauty 2,700 2,700
Creative Images 5,700 5,700
Excel Hair Products 800 800
First Class Hair Care 1,900 1,900
Golden Images 600 600
Oh the Hair 3,200 3,200
One Stop Hair Dsigns 2,100 2,100
Visions Hair and Nail 6,900 6,900
Totals 677,300 369,500 158,900 75,700 26,900 27,300 19,000
Percentage Uncollectible 2 % 4% 10% 15 % 35 % 75 %
Estimate of Uncollectible Accounts 49,156 7,390 6,356 7,570 4,035 9,555 14,250

3. Allowance for doubtful accounts: $ 49,156

4.

Debit Credit
Bad Debt Expense 47,426
Allowance for Uncollectible Accounts 47,426

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