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Intermediate Accounting (Kieso)
Found in: Page 371

Short Answer

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000. 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

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

1. Total allowance for doubtful accounts: $60,000.

2. Net accounts receivables: $495,000.

3. Dollar effect: $20,000.

See the step by step solution

Step by Step Solution

Definition of Allowance for Doubtful accounts

The contra-asset account that gets adjusted against the gross receivables of the business entity is known as allowance for doubtful accounts. It is calculated as an estimated percentage of gross receivables or credit sales.

Balance in allowance for doubtful accounts

Days Account Outstanding

Amount

Probability of Collection

Probability of uncollectible

Amount of uncollectible

Less than 16 days

$300,000

.98

0.02

$6,000

Between 16 and 30 days

100,000

.90

0.10

10,000

Between 31 and 45 days

80,000

.85

0.15

12,000

Between 46 and 60 days

40,000

.80

0.20

8,000

Between 61 and 75 days

20,000

.55

0.45

9,000

Over 75 days

15,000

.00

100

15,000

Total allowance for doubtful accounts$60,000

Representation of accounts receivables on the balance sheet

Particular

Amount $

Accounts receivables

$555,000

Less: Total allowance for doubtful accounts

(60,000)

Net accounts receivable

$495,000

Dollar effect of year-end bad debt adjustments on before-tax income

Particular

Amount $

Estimated allowance for doubtful accounts

$60,000

Less: Credit balance in the allowance for doubtful accounts

(40,000)

Dollar effect on before tax income

$20,000

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