[jvillemaire]

4. A company uses the aging of accounts receivable method to estimate its bad debts expense. On December 31 of the current year an aging analysis of accounts receivable revealed the following:

Accounts Receivable Account Age Estimated Uncollectible
$620,000 not yet due 0.5%
270,000 1-30 days overdue 2.0
145,000 31-60 days overdue 8.0
55,000 61-90 days overdue 20.0
32,000 91-120 days overdue 50.0
18,000 over 120 days overdue 70.0

Required:
a. Calculate the amount of the Allowance for Doubtful Accounts that should be reported on the current year-end balance sheet.
b. Calculate the amount of the Bad Debts Expense that should be reported on the current year's income statement, assuming that the balance of the Allowance for Doubtful Accounts on January 1 of the current year was $44,000 and that accounts receivable written off during the current year totaled $49,200.
c. Prepare the adjusting journal entry to record bad debts expense on December 31 of the current year.
d. Show how Accounts Receivable will appear on the current year-end balance sheet as of December 31.


I calculated a to equal $59,700. I am completely lost as to what to do with b-d. Please help me... it is very important! Thank you.

[morgaine300]

Oh, this would be so much easier to explain if I could draw t accounts and show you. I haven't yet tried to explain this one in words only. Here goes:

The allowance account is a contra asset account, which reduces the receivables, so it is a credit balance. When you do an actual write off, you credit John Doe's account out of the receivables and debit it out of the allowance account also. i.e. each account is reduced. So that's what the write-offs during the year are going to do to your balance. You need to get this balance first.

With the method you're using, analysis of receivables, the number you got (59,700) is the balance you want to have in the allowance account at year-end. i.e. this is not your adjusting entry, but the balance you want. (You can't journalize a balance.) Here's where a t account would come in handy. You need to look at the balance in the account, and figure out what needs added (credited) to that account to get to the 59,700 balance. That's the number you will use in the entry.

The adjusting entry is always a dr to Bad Debt Expense or Uncollectible Accounts Expense, or whatever you're book is calling it, and a credit to the Allowance account. Remember that expenses are always debits. And this allowance account is a contra asset, making it a credit.

That allowance will then reduce the amount of the receivables. The receivables don't have value if you think you can't collect them. So the estimate of what you think you can't collect reduces that value to a lower net number. (Called net realizable value.) There's actually two ways you can present this on the balance sheet. Hopefully your book has an example of this.