Question

Problem 7-3 (Part Level Submission) Pearl Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Pearl's Accounts Receivable account was $595,600 and Allowance for Doubtful Accounts had a credit balance of $40,350. 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 $314,500 0.97 Between 16 and 30 days 119,900 0.90 Between 31 and 45 days 84,800 0.85 Between 46 and 60 days 43,000 0.82 Between 61 and 75 days 19,800 0.53 Over 75 days 13,600 0.00 Assume that accounts with a zero percent chance of collection are intended to be written off. Collapse question part (a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end? Balance for Allowance for Doubtful Accounts

Answer 1

ALLOWANCE FRO DOUBTFUL ACCOUNTS
DATE	PARTICULAR	AMOUNT	DATE	PARTICULAR	AMOUNT
START OF YEAR	TO BAD DEBTS              (WRITE OFF FOR 0% PROBABILITY)	$        13,600	START OF YEAR	BY OPENING BALANCE	$        40,350
END OF YEAR	TO CLOSING BALANCE	$        77,941	END OF YEAR	BY NEW ALLOWANCE FOR DOUBTFUL (AS CALCULATED BELOW)	$        51,191
		$        91,541			$        91,541

DAYS
FROM	TO	AMOUNT OF RECEIVABLE	PROBABILITY OF COLLECTION	PROBABILITY OF NOT COLLECTION	NEW ALLOWANCE REQUIRED
LESS THAN 16		314500	0.97	0.03	9435
16	30	119900	0.9	0.1	11990
31	45	84800	0.85	0.15	12720
46	60	43000	0.82	0.18	7740
61	75	19800	0.53	0.47	9306
NEW ALLOWANCE REQUIRED					51191
AMOUNT OF RECEIVABLE OVER 75 DAYS OF 13600 WITH COLLECTION PROBABILITY OF 0% IS COMPLETELY WRITTEN OF TO BAD DEBTS