26. Sullivan Co.\'s accounts receivable show the following balances by age: Age

Question

26. Sullivan Co.'s accounts receivable show the following balances by age:
Age of Receivable Balance
0-30 days $600,000
31-60 days 175,000
61-120 days 70,000
more than 120 days 10,000
The credit balance in the allowance for uncollectible accounts is $2,500. Sullivan Co. uses the following percentages to compute the estimated amounts of receivables that will eventually prove uncollectible: 0-30 days, 0.7%; 31-60 days, 1.2%; 61-120 days, 11%; and more than 120 days, 65%.

a) Compute the balance in the allowance for doubtful accounts at year end
b) Compute the bad debt expense for the year

Explanation / Answer

a)     Age Amount % Estimate to be Uncollectible Reauired balance in Allowance 1-30 Days $600,000 0.70% $4,200.00 31-60 Days $175,000 1.00% $1,750.00 61-120 Days $70,000 11% $7,700 More than 120 Days $10,000 65% $6,500 Year-end balance of allowance for doubtful accounts     = $20,150 Age Amount % Estimate to be Uncollectible Reauired balance in Allowance 1-30 Days $600,000 0.70% $4,200.00 31-60 Days $175,000 1.00% $1,750.00 61-120 Days $70,000 11% $7,700 More than 120 Days $10,000 65% $6,500 Year-end balance of allowance for doubtful accounts     = $20,150
b) Sullivan reports bad debt expense of $20,150 for this year, assuming that no balance existed in the allowance account.       To change the illustation slightly, assume that the allowance account had a credit balance of $2,500 before adjustment. In this case, Sullivan adds $17,650($20,150 - $2,500). to the allowance account, and makes the following entry.                            Bad debts Expense               $17,650                                        Allowance for doubtful Accounts            $17,650. Age Amount % Estimate to be Uncollectible Reauired balance in Allowance 1-30 Days $600,000 0.70% $4,200.00 31-60 Days $175,000 1.00% $1,750.00 61-120 Days $70,000 11% $7,700 More than 120 Days $10,000 65% $6,500 Year-end balance of allowance for doubtful accounts     = $20,150

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