Question

P6-3 (Algo) Determining Bad Debt Expense Based on Aging Analysis LO6-2

[The following information applies to the questions displayed below.]

Blue Skies Equipment Company uses the aging approach to estimate bad debt expense at the end of each accounting year. Credit sales occur frequently on terms n/60. The balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, (2) up to one year past due, and (3) more than one year past due. Experience has shown that for each age group, the average loss rate on the amount of the receivable at year-end due to uncollectibility is (a) 7 percent, (b) 10 percent, and (c) 32 percent, respectively.

At December 31, 2019 (end of the current accounting year), the Accounts Receivable balance was $49,600 and the Allowance for Doubtful Accounts balance was $990 (credit). In determining which accounts have been paid, the company applies collections to the oldest sales first. To simplify, only five customer accounts are used; the details of each on December 31, 2019, follow:

B. Brown—Account Receivable
Date	Explanation	Debit	Credit	Balance
03/11/2018	Sale	13,700		13,700
06/30/2018	Collection		4,800	8,900
01/31/2019	Collection		3,600	5,300

D. Donalds—Account Receivable
Date	Explanation	Debit	Credit	Balance
02/28/2019	Sale	21,400		21,400
04/15/2019	Collection		8,000	13,400
11/30/2019	Collection		4,200	9,200

N. Napier—Account Receivable
Date	Explanation	Debit	Credit	Balance
11/30/2019	Sale	8,200		8,200
12/15/2019	Collection		2,900	5,300

S. Strothers—Account Receivable
Date	Explanation	Debit	Credit	Balance
03/02/2017	Sale	5,800		5,800
04/15/2017	Collection		5,800	0
09/01/2018	Sale	10,100		10,100
10/15/2018	Collection		4,600	5,500
02/01/2019	Sale	22,100		27,600
03/01/2019	Collection		6,000	21,600
12/31/2019	Sale	2,600		24,200

T. Thomas—Account Receivable
Date	Explanation	Debit	Credit	Balance
12/30/2019	Sale	5,600		5,600

Required: 1. Compute the total accounts receivable in each age category. Amount Not yet due Up to one year past due More than one year past due Total accounts receivable

Answer 1

1	B Brown
	Compute the total account receivable in each category
		Amount
	Not Yet Due
	Upto one year past due
	More than one year past due	5300
	Total Account Receivable
	Compute the estimated uncollectible amount for each age category and in total
		Amount
	Not Yet Due
	Upto one year past due
	More than one year past due	1696
	Total Account Receivable	1696
2	Donald
	Compute the total account receivable in each category
		Amount
	Not Yet Due
	Upto one year past due	9200
	More than one year past due
	Total Account Receivable	9200
	Compute the estimated uncollectible amount for each age category and in total
		Amount
	Not Yet Due
	Upto one year past due	920
	More than one year past due
	Total Account Receivable	920
3	N. Napier
	Compute the total account receivable in each category
		Amount
	Not Yet Due	5300
	Upto one year past due
	More than one year past due
	Total Account Receivable	5300
	Compute the estimated uncollectible amount for each age category and in total
		Amount
	Not Yet Due	371
	Upto one year past due
	More than one year past due
	Total Account Receivable	371
4	S. Strothers
	Compute the total account receivable in each category
		Amount
	Not Yet Due	2600
	Upto one year past due	21600
	More than one year past due
	Total Account Receivable	24200
	Compute the estimated uncollectiable amount for each age category and in total
		Amount
	Not Yet Due	182
	Upto one year past due	2160
	More than one year past due
	Total Account Receivable	2342
5	T Thomas
	Compute the total account receivable in each category
		Amount
	Not Yet Due	5600
	Upto one year past due
	More than one year past due
	Total Account Receivable	5600
	Compute the estimated uncollectiable amount for each age category and in total
		Amount
	Not Yet Due	392
	Upto one year past due
	More than one year past due
	Total Account Receivable	392
	Provision for Bad Debt A/c Dr	5721
	To Accounts Receivables		5721
	Income Statement
	Operating Expenses
	Provision for Bad debts	5721
	Balance Sheet
	Currents Assets
	Accounts Receivables	49600
	Less: Provision for Bad Debts	5721

Answer 2

1.

	Amount
Not yet due	13500
Up to one year past due	30800
More than one year past due	5300
Total accounts receivable $	49600

Working:

Account	Balance	Not yet due	Up to one year past due	More than one year past due
B. Brown	5300			5300
D. Donalds	9200		9200
N. Napier	5300	5300
S. Strothers	24200	2600	21600
T. Thomas	5600	5600
Total $	49600	13500	30800	5300

2.

Estimated uncollectible amount:
	Amount
Not yet due	945
Up to one year past due	3080
More than one year past due	1696
Total $	5721

Working:

Aging	Amount	Estimated Uncollectible Percent	Estimated Uncollectible Amount
Not yet due	13500	7%	945
Up to one year past due	30800	10%	3080
More than one year past due	5300	32%	1696

3.

Transaction	General Journal	Debit	Credit
A	Bad debt expense ($5721 - $990)	4731
	Allowance for doubtful accounts		4731
	(To record bad debt expense)

4.

BLUE SKIES EQUIPMENT COMPANY
Income Statement (partial)
For the Year Ended December 31, 2019
Operating expenses:
Bad debt expense	4731

5.

BLUE SKIES EQUIPMENT COMPANY
Balance Sheet (partial)
As of December 31, 2019
Current assets:
Accounts receivable	49600
Less: Allowance for doubtful accounts	-5721
Accounts receivable (net)		43879