Question

A certain company has historical records that show that: 20% of its customers pay in the first month after being invoiced 42% of its customers pay in the second month after being invoiced 20% of its customers pay in the third month after being invoiced Any debts that are still outstanding after three months are sold to a debt collection agency for 40% of their value On the last business day of each month the company's accounting department issues all invoices for the month, issues reminders for previous invoices that have not yet been paid, and sells the unpaid three month old debts to the debt collection agency. Immediately after performing these actions in a particular month its accounts receivable profile is Months since the customer was invoiced Total outstanding $6,200 $3,300 $1,200 2 How much should this company allow for doubtful accounts at this time? (Answer to the nearest cent). Number

Answer 1

Doubtful accounts the company should allow be calculated as follows:  

For the outstanding amount of $ 6,200 no invoices are issued. Hence it will remain doubtful.

After one month issue of invoice, the amount outstanding is $ 3,300 which should represent 80% of the total amount, since 20% of the customers pay in the first month after being invoiced.

After two months issue of invoice, the amount outstanding is $ 1,200 which sould represent 58% of the total amount because 42% of the customers pay after two months of issuing invoice.

Therefore total doubtful accounts will be equal to $ 10,700