Question

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	914,200	507,300	219,400	100,600	33,800	30,200	22,900

The following accounts were unintentionally omitted from the aging schedule:

Customer	Due Date		Balance
Arcade Beauty		May 28, 20Y1	$2,800
Creative Images		Sept. 7, 20Y1	5,800
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	3,300
One Stop Hair Designs		Dec. 2, 20Y1	2,100
Visions Hair and Nail		Jan. 5, 20Y2	7,100

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	80

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%	80%
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 $1,640 before adjustment on December 31, 20Y1. Journalize the adjustment for uncollectible 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   by   because the allowance for doubtful accounts would be   by  . In addition, the owner’s capital account would be   by   because bad debt expense would be   and net income   by  on the income statement.

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Answer 1

Required 1

Customer	Due Date	Number of Days Past Due
Arcade Beauty	May 28, 20Y1	217.00
Creative Images	Sept. 7, 20Y1	115.00
Excel Hair Products	Oct. 17, 20Y1	75.00
First Class Hair Care	Oct. 24, 20Y1	68.00
Golden Images	Nov. 23, 20Y1	38.00
Oh The Hair	Nov. 29, 20Y1	32.00
One Stop Hair Designs	Dec. 2, 20Y1	29.00
Visions Hair and Nail	Jan. 5, 20Y2	0.00

Required 2

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	914,200	507,300	219,400	100,600	33,800	30,200	22,900
Arcade Beauty	2,800						2,800
Creative Images	5,800					5,800
Excel Hair Products	800				800
First Class Hair Care	1,900				1,900
Golden Images	600			600
Oh The Hair	3,300			3,300
One Stop Hair Designs	2,100		2,100
Visions Hair and Nail	7,100	7,100
Total	938,600	514,400	221,500	104,500	36,500	36,000	25,700
Percent uncollectible		2%	4%	10%	15%	35%	80%
Estimate of uncollectible accounts	68,233	10,288	8,860	10,450	5,475	12,600	20,560

Required 3

Estimate the allowance for doubtful accounts = $68,233 as shown above.

Required 4

Required Allowance Credit Balance = 68233

Existing allowance credit balance = 1640

Required creation of allowance = 68233-1640 = 66593

Particulars	Debit	Credit
Bad Debts Expense	66593
To Allowance for Doubtful Debts		66593
(To create allowance for doubtful debts.)

Required 5

On the balance sheet, assets would be overstated by 66593  because the allowance for doubtful accounts would be understated  by 66593 . In addition, the owner’s capital account would be  overstated  by  66593 because bad debt expense would be  understated and net income  overstated by 66593  on the income statement.