Valdez Company uses the percent of receiveables method to estimate uncollectible

ID: 2378750 • Letter: V

Question

Valdez Company uses the percent of receiveables method to estimate uncollectible accounts expense. Valdez began 2011 with balances in Accounts Receivable and Allowance for Doubtful Accounts of $38,250 and $2,900, respectively. During the year, the company wrote off $2.320 in uncollectible acounts. In preparation for the company's 2011 estimates, Valdez prepared the following aging schedule:

Number of days past due              Receivables amount          % Likely to be uncollectible
Current                                                         $26,000                       1%

0-30                                                           $11,250                          5%

31-60                                                         $2,480                            10%

61-90                                                           $1,110                          25%

Over 90                                                         $950                            50%

Total $41,790

What will Valdez record as Uncollectible Accounts Expense for 2011?

Explanation / Answer

Number of days past due

Receviables amount

% likely to be uncollectible

Amount likely to be uncollectible

Current

26,000

260

0-30

11,250

562.50

31-60

2,480

10%

248

61-90

1,110

25%

277.50

Over 90

950

50%

475

Total

41,790

1823

To find amounts in the 4th column, multiply the 2nd column by the 1st. For example, 26,000*1% = 26,000*0.01 = 260. Then add up the amounts in the last column, and you get 1823. This is the amount that you want the Allowance for Doubtful Accounts to equal.

They started the year out with 2900 in the allowance for doubtful accounts, and they wrote off 2,320 in uncollectible accounts. 2900 – 2320 = 580, so they have $580 left in the allowance for doubtful accounts. If they want it to equal 1823, they need to increase it by 1243, since 1823 – 580. So to increase the allowance account by the appropriate, they will need to make an entry:

Debit: Uncollectible Accounts Expense 1823

Credit: Allowance for Doubtful Accounts 1823

So the uncollectible account expense is 1823.