Question

Estimating Doubtful Accounts

Performance Bike Co. is a wholesaler of motorcycle supplies. An aging of the company's accounts receivable on December 31 and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:

Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31.

Performance Bike Co.
Estimation of Uncollectible Accounts
December 31
Age Interval	Balance	Estimated Uncollectible Accounts Percent	Estimated Uncollectible Accounts Amount
Not past due	$462,000	1/2%	$
1-30 days past due	50,800	4
31-60 days past due	23,100	8
61-90 days past due	16,600	17
91-180 days past due	12,000	41
Over 180 days past due	8,800	70
Total	$573,300		$

Effect of Doubtful Accounts on Net Income

During its first year of operations, Mack’s Plumbing Supply Co. had sales of $250,000, wrote off $4,000 of accounts as uncollectible using the direct write-off method, and reported net income of $27,500. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1 3/4% of sales would be uncollectible.
$

Answer 1

Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31.

Performance Bike Co.
Estimation of Uncollectible Accounts
December 31
Age Interval	Balance	Estimated Uncollectible Accounts Percent	Estimated Uncollectible Accounts Amount
Not past due	$462,000	1/2%	$2310
1-30 days past due	50,800	4	2032
31-60 days past due	23,100	8	1848
61-90 days past due	16,600	17	2822
91-180 days past due	12,000	41	4920
Over 180 days past due	8,800	70	6160
Total	$573,300		$20092

b) Effect on net income

Net income	27500
Less: Bad debt under direct method	-4000
Add Bad debt under allowance method (250000*1%*3/4)	1875
Net income under allowance method	25375

Net income decrease by (29625-27500) = $2125