Question

Credit Losses Based on Accounts Receivable

Miller, Inc., analyzed its accounts receivable balances at December 31 and arrived at the aged balances listed below, along with the percentage that is estimated to be uncollectible:

Age Group

Balance Probability of

Noncollection

0–30 days past due $180,000 1%

31–60 days past due 40,000 4%

61–120 days past due 22,000 5%

121–180 days past due 14,000 12%

Over 180 days past due 8,000 25%

$264,000

The company handles credit losses using the allowance method. The credit balance of the Allowance for Doubtful Accounts is $1,150 on December 31, before any adjustments.

Prepare the adjusting entry for estimated credit losses on December 31.

Prepare the journal entry to write off the Lyons Company’s account on April 10 of the following year in the amount of $575.

a.

General Journal

Date Description Debit Credit

Dec.31

To record allowance for credit losses.

b.

General Journal

Date Description Debit Credit

April 10

To write off Lyons Company's account.

Please answer all parts of the question.

Answer 1

The Required Ending Balance of Allowances for Doubtful Accounts is calculated as follows:-

Age Group	Balance (A)	Probability (B)	Expected Amount (A*B)
0–30 days past due	180,000	1%	1,800
31–60 days past due	40,000	4%	1,600
61–120 days past due	22,000	5%	1,100
121–180 days past due	14,000	12%	1,680
Over 180 days past due	8,000	25%	2,000
Total	264,000		8,180

The required ending balance in Allowance is $8,180 and the credit balance of the Allowance before any adjustments is $1,150. The adjusting entry will be required for $7,030.

a&b) Journal Entries (Amounts in $)

Date	Description	Debit	Credit
Dec. 31	Bad debt expense	7,030
	Allowance for Doubtful Debts		7,030
	(To record allowance for credit losses)
April 10	Allowance for Doubtful Debts	575
	Accounts Receivable-Lyons		575
	(To write off Lyons Company's account)