Question

Brown Cow Dairy uses the aging approach to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three time periods as follows: (1) 1–30 days old, $12,700; (2) 31–90 days old, $5,700; and (3) more than 90 days old, $3,700. For each age group, the average loss rate on the amount of the receivable due to uncollectibility is estimated to be (1) 5 percent, (2) 10 percent, and (3) 15 percent, respectively. At December 31 (end of the current year), the Allowance for Doubtful Accounts balance was $870 (credit) before the end-of-period adjusting entry is made.

Required:

1. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

2. What amount of Bad Debt Expense should be recorded on December 31?

3. If the unadjusted balance in the Allowance for Doubtful Accounts was a $670 debit balance, what amount of Bad Debt Expense should be recorded on December 31?

Answer 1

Age on account	Dollar value	Estimated uncollectible	Uncollectible amount
1-30 Days	$           12,700	5%	$                                      635
31-90 Days	$              5,700	10%	$                                      570
More than 90 Days	$              3,700	15%	$                                      555
Total uncollectible amount			$                                  1,760

Uncollectible amount	$   1,760
Less: Unadjusted Allowance for Doubtful Accounts balance	$    (870)
Bad Debt Expense	$      890

Uncollectible amount	$   1,760
Add: Debit balance in Unadjusted Allowance for Doubtful Accounts balance	$      670
Bad Debt Expense	$   2,430

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