Question

Using an Aging Schedule to Account for Bad Debts

Carter Company sells on credit with terms of n/30. For the $500,000 of accounts at the end of the year that are not overdue, there is a 90% probability of collection. For the $200,000 of accounts that are less than a month past due, Carter estimates the likelihood of collection going down to 70%. The probability of collecting the $100,000 of accounts more than a month past due is estimated to be 25%.

Required:

1. Prepare an aging schedule to estimate the amount of uncollectible accounts.

Carter Company
Aging Schedule to Account for Bad Debts
Category	Estimated Amount	Percent Uncollectible	Amount Uncollectible
Current	$	%	$
Past due:
Less than one month		%
More than one month		%
Totals	$		$

2. On the basis of the schedule in part (1), identify and analyze the adjustment needed to estimate bad debts. Assume that the balance in Allowance for Doubtful Accounts is $20,000.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

Answer 1

Carter Company
Aging Schedule to Account for Bad Debt
Period outstanding	Estimated Amount	Percent Uncollectibe	Amount Uncollectibe
Year end	$500,000.00	10%	$50,000.00
Less than a month	$200,000.00	30%	$60,000.00
More than a month	$100,000.00	75%	$75,000.00
Total	$800,000.00		$185,000.00

Journal General
Account Tittle	Debit	Credit
Bad debt expense (185000-20000)	$165,000.00
Allowance for doubtful debts		$165,000.00

Balance sheet					Income statement
				Stockholder
Asset	=	Liabilities	+	Equity	Revenue	-	Expense	=	Net Income
		$165,000.00		-$165,000.00			$165,000.00		-$165,000.00