Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 8 Receivables 361

As shown above, after the adjusting entry is recorded, the Allowance for Doubtful

Accounts has a credit balance of $48,250. If there had been a debit balance of $4,100 in

the allowance account before the year-end adjustment, the amount of the adjustment

would still have been $45,000. However, the December 31 ending balance of the al-

lowance account would have been $40,900 ($45,000 $4,100). In other words, under

the percent of sales method, the bad debt expense is credited to whatever balance

exists in the Allowance for Doubtful Accounts.

Estimate Based on Analysis of Receivables. The longer an account receivable is

outstanding, the less likely that it will be collected. Thus, we can base the estimate of

uncollectible accounts on how long specific accounts have been outstanding. For this

purpose, we can use a process called aging the receivables.

Receivables are aged by preparing a schedule that classifies each customer’s re-

ceivable by its due date. The number of days an account is past due is the number of

days between the due date of the account and the date the aging schedule is prepared.

To illustrate, assume that Rodriguez Company is preparing an aging schedule for its

accounts receivable of $86,300 as of August 31, 2008. The $160 account receivable for

Saxon Woods Company was due on May 29. As of August 31, Saxon’s account is

94 days past due, as shown below.

Number of days past due in May 2 days (31 – 29)

Number of days past due in June 30 days

Number of days past due in July 31 days

Number of days past due in August 31 days

Total number of days past due 94 days

A portion of the aging schedule for Rodriguez Company is shown in Exhibit 1. The

schedule shows the total amount of receivables in each aging class.

Rodriguez Company uses a sliding scale of percentages, based on industry or

company experience, to estimate the amount of uncollectibles in each aging class. As

shown in Exhibit 2, the percent estimated as uncollectible increases the longer the

account is past due. For accounts not past due, the percent is 2%, while for accounts

over 365 days past due the percent is 80%. The total of these amounts is the desired

end-of-the-period balance for the Allowance for Doubtful Accounts. For Rodriguez

Company, the desired August 31 balance of the Allowance for Doubtful Accounts is

$3,390.

Comparing the estimate of $3,390 with the unadjusted balance of the allowance ac-

count determines the amount of the adjustment for bad debt expense. For example,

assume that the unadjusted balance of the allowance account is a credit balance of

BAD DEBT EXPENSE

Dec. 31 Adjusting entry 45,000

Dec. 31 Adjusted balance 45,000

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Jan. 1, 2008 Bal. 40,000

Total accounts

Jan. 21 6,000

written off $36,750

Feb. 2 3,900

Dec. 31 Unadjusted balance 3,250

Dec. 31 Adjusting entry 45,000

Dec. 31 Adjusted balance 48,250

Q.Before the year-end
adjustment, the Allowance
for Doubtful Accounts has
a credit balance of
$45,000. Uncollectible
accounts are estimated as
2% of credit sales of
$1,200,000. The accounts
receivable balance before
adjustment is $290,000.
What is (1) the bad debt
expense for the period,
(2) the balance of the
Allowance for Doubtful
Accounts after adjustment,
and (3) the net realizable
value of the receivables
after adjustment?

A.(1) $24,000 (2%
$1,200,000);
(2) $69,000 ($24,000
$45,000); and
(3) $221,000
($290,000$69,000)

{

.

.

.

.

.

.