Question

Instructions Answer the questions relating to each of the five independent situations as requested. P7.3 (LO 3) Excel (Bad-Debt Reporting-Aging) 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 The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below. a Probability of Collection Days Account Outstanding Less than 16 days Between 16 and 30 days Between 31 and 45 days Between 46 and 60 days Between 61 and 75 days Over 75 days (to be written off) Amount $300,000 100,000 80,000 40,000 20,000 15,000 .98 .90 .85 .80 .55 .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?

Answer 1

a]	Appropriate balance in the allowance account is the estimated amount
	that will not be collected from the AR of $555,000. It is worked out below:
	Days account outstanding	Amount	Probability of default	Expected amount of default
	Less than 16 days	$           300,000	0.02	$ 6,000
	Between 16 and 30 days	$           100,000	0.10	$          10,000
	Between 31 and 45 days	$             80,000	0.15	$          12,000
	Between 46 and 60 days	$             40,000	0.20	$ 8,000
	Between 61 and 75 days	$             20,000	0.45	$ 9,000
	Over 75 days	$             15,000	1.00	$          15,000
	Total			$          60,000
	Appropriate balance in the allowance account at year end =	$          60,000
b]	BALANCE SHEET [PARTIAL]
	Assets
	Current assets:
	Cash		xxxx
	Accounts receivable	$           555,000
	Less: Allowance for doubtful accounts	$             60,000
	Accounts receivable [net]		$          60,000
c]	Dollar effect of the year end bad debt adjustment on the before tax income = 60000-40000 =	$             20,000	Decrease in before tax income