Financial Accounting: An Integrated Statements Approach, 2nd Edition

Miller Wigs has a past history of uncollectible accounts by age category, as follows:

Percentage

Age Class 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

Instructions

1. Determine the number of days past due for each of the preceding accounts.


2. Complete the aging-of-receivables schedule.


3. Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule.


4. Assume that the allowance for doubtful accounts for Miller Wigs has a credit balance of
   $11,350 before adjustment on December 31, 2007. Illustrate the effect on the accounts and
   financial statements of the adjustment for uncollectible accounts.

Baron Company, which operates a chain of 30 electronics supply stores, has just completed its

fourth year of operations. The direct write-off method of recording bad debt expense has been

used during the entire period. Because of substantial increases in sales volume and the amount

of uncollectible accounts, the firm is considering changing to the allowance method. Information

is requested as to the effect that an annual provision of^1 – 2 % of sales would have had on the

amount of bad debt expense reported for each of the past four years. It is also considered de-

sirable to know what the balance of Allowance for Doubtful Accounts would have been at the

end of each year. The following data have been obtained from the accounts:

Uncollectible Year of Origin of

Accounts Accounts Receivable Written

Written Off as Uncollectible

Year Sales Off 1st 2nd 3rd 4th

1st $ 500,000 $ 600 $ 600

2nd 750,000 1,500 700 $ 800

3rd 1,150,000 6,500 1,900 1,500 $3,100

4th 2,100,000 8,850 2,000 3,050 $3,800

Instructions

1. Assemble the desired data, using the following column headings:

Bad Debt Expense

Expense Expense Increase (Decrease) Balance of

Actually Based on in Amount Allowance Account,

Year Reported Estimate of Expense End of Year

2. Experience during the first four years of operations indicated that the receivables were ei-
   ther collected within two years or had to be written off as uncollectible. Does the estimate
   of^1 – 2 % of sales appear to be reasonably close to the actual experience with uncollectible ac-
   counts originating during the first two years? Explain.

Abdou Co. produces advertising videos. During the last six months of the current fiscal year,

Abdou Co. received the following notes:

Face Interest

Date Amount Term Rate

1. May 17 $12,000 45 days 9%


2. July 9 10,000 60 days 8

386 Chapter 8 Receivables

Problem 8-3A

Compare two methods of

Accounting for Merchandise Operations

receivables

Goals3, 4

1. Year 4: Balance of
   allowance account, end of
   year, $5,050

Problem 8-4A

Details of notes receivable

and related entries

Goal 6