Question

Splish Corporation operates in an industry that has a high rate of bad debts. Before any year-end
adjustments, the balance in Splish's Accounts Receivable account was $592,700 and Allowance for
Doubtful Accounts had a credit balance of $40,680. The year-end balance reported in the balance
sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.
Days Account Outstanding    Amount    Probability of Collection

Less than 16 days    $314,400 0.96
Between 16 and 30 days 116,600    0.90
Between 31 and 45 days    85,600 0.86
Between 46 and 60 days    41,900    0.79
Between 61 and 75 days 18,600 0.53

Over 75 days (to be written off ) 15,600 0.00

What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

Balance for Allowance for Doubtful Accounts $

Show how accounts receivable would be presented on the balance sheet.
SPLISH CORPORATION
Balance Sheet (Partial)

$

:

$

What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Dollar effect of the year-end bad debt adjustment
$

Answer 1

Solution 1:

Computation of Allowance for Uncollectible Accounts
Days outstanding	Accounts Receivables	Probability of non collection	Required balance in allowance account
Less than 16 days	$314,400.00	0.040	$12,576.00
Between 16 and 30 days	$116,600.00	0.100	$11,660.00
Between 31 and 45 days	$85,600.00	0.140	$11,984.00
Between 46 and 60 days	$41,900.00	0.210	$8,799.00
Between 61 and 75 days	$18,600.00	0.470	$8,742.00
Over 75 days	$15,600.00	1.000	$15,600.00
Total	$592,700.00		$69,361.00

Solution 2:

Balance sheet (Partial)
Particulars		Amount
Accounts receivables, Gross	$592,700.00
Less: Allowance for doubtful accounts	$69,361.00
Accounts receivables, net		$523,339.00

Solution 3:

Dollar effect of the year-end bad debt adjustment on the before-tax income = $69,361 - $40,680 = $28,681