A Company Uses the Aging of Accounts Receivable Method to Estimate

question 81

Essay

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:
$$\begin{array} { | r | l | c | } \hline \begin{array} { c } \text { Accounts } \\\text { Receivable }\end{array} & { \text { Account Age } } & \begin{array} { c } \text { Estirnated } \\\text { Uncollectible }\end{array} \\\hline \$ 620,000 & \text { Not due yet } & 0.5 \% \\\hline 270,000 & 1 - 30 \text { days overdue } & 2.0 \\\hline 145,000 & 31 - 60 \text { days overdue } & 8.0 \\\hline 55,000 & 61 - 90 \text { days overdue } & 20.0 \\\hline 32,000 & 91 - 120 \text { days overdue } & 50.0 \\\hline \underline { 18,000 } & \text { Over } 120 \text { days overdue } & 70.0 \\\hline \$ 1,140,000 & \text { Total } & \\\hline\end{array}$$ 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.

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Definitions:

Bacteria

Microscopic, single-celled organisms found in diverse environments, capable of causing disease or contributing to health.

White Pulp

Part of the spleen consisting of lymphatic nodules and diffuse lymphatic tissue; associated with arteries.

Spleen

Large lymphatic organ in the upper part of the abdominal cavity on the left side between the stomach and diaphragm, composed of white and red pulp. It responds to foreign substances in the blood, destroys worn-out red blood cells, and is a storage site for blood cells.

Immune Response

The body's defense mechanism against pathogens, involving recognition and destruction of harmful substances or organisms.