Question

Paisley Corporation operates in an industry that has a high rate of bad debt. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below:

		Expected Percentage
Days Account		Uncollectible	Estimated Uncollectible
Outstanding	Amount
0–30 days	$351,600	0.05	$17,580
31–60 days	$122,400	0.1	$12,240
61–90 days	$84,000	0.2	$16,800
91–120 days	$66,000	0.3	$19,800
Over 120 days	$9,600	0.4	$3,840
	633,600		$70,260
Accounts receivable .............................................................................................		$633,600
Less: Allowance for doubtful accounts ..................................................................		70,260
Accounts receivable (net) .....................................................................................		$563,340
Estimated amount required in the Allowance
for Doubtful Accounts (credit balance) ...............................................................		$70,260
Balance in the account after write-off of uncollectible
accounts but before adjustment (debit balance) ................................................		$8,000
Required charge to expense (need to add due to debit balance) ...................		$78,260

Before year-end adjustments, Paisley’s Allowance for Doubtful Accounts had a debit balance of $8,000.

What is the appropriate balance for the Allowance for Doubtful Accounts at year-end?
Show how accounts receivable would be presented on the balance sheet. State the differences between U.S. GAAP and IFRS reporting for accounts receivable.
What is the year-end bad debt adjustment?

Answer 1

Debit balance in fhe allowance for doubtful debt is possible when actual bad debt expense exceeds the estimated provision created for uncollectible debts. In the given scenario, estimated provision created was $70260 while the actual bad debt expense incurred was $78260 thus the balance lying in debit balance represents the excess of actual debts over estimated provision created for the bad debt.

The appropriate balance for the allowance for doubtful debt should have been $78260 or more as it could have met the contingency of bad debts more than usual trend.

on an analytical note, company should create higher provisions for debtors crossing the timeframe of more than 120 days with allowance as high as 100%.

Accounts receivables being an asset for the company is presented on Assets side of the balance sheet.

Year end bad debt adjustment includes writting off the balance provided for doubtful debts. Any excess is moved to the statement of profit or loss account. There is no major difference between IFRS and US GAAP with respect to reporting of accounts receivables.