Blue Skies Equipment Company uses the aging approach to estimatebad debt expense

Question

Blue Skies Equipment Company uses the aging approach to estimatebad debt expense at the end of each accounting year. Credit salesoccur frequently on terms n/60. The balance of each accountreceivable is aged on the basis of three time periods as follows:(1) not yet due, (2) up to one year past due, and (3) more than oneyear past due. Experience has shown that for each age group, theaverage loss rate on the amount of the receivable at year-end dueto uncollectability is (a) 1 percent, (b) 5 percent, and (c) 30percent, respectively.

At December 31, 2008 (end of the current accounting year), theAccounts Receivable balance was $42,000, and the Allowance forDoubtful Accounts balance was $1,020 (credit). In determining whichaccounts have been paid, the company applies collections to theoldest sales first. To simplify, only five customer accounts areused; the details of each on December 31, 2008, follow:

Explanation / Answer

Name of the Customer

Balance

Not yet due

up to one year

more than one

Dec. 31

past due

year past due

$

$

$

$

Age

Percentage

Amount

Required Balance

Estimated to be

in Allowance

Uncollectible

$

$

Not Yet due

1%

17000

170

up to one year

5%

18000

900

past due

       

more than one

30%

7000

2100

year past due

Year -end balance ofallowance for doubtful accounts

$3,170

Allowance for Doubtfull accounts (cr.)balance

$1,020

Blue skies EquipmentCO. Aging Schedule

Name of the Customer

Balance

Not yet due

up to one year

more than one

Dec. 31

past due

year past due

$

$

$

$

B.Brown 5000 5000 D. Donalds 4000 4000 N.Napier 7000 7000 S.Strothers 19000 3000 14000 2000 T.Thomas 7000 7000 Total Accounts Receivable $42000 $17000 $18000 $7000 31 Dec.2008

Age

Percentage

Amount

Required Balance

Estimated to be

in Allowance

Uncollectible

$

$

Not Yet due

1%

17000

170

up to one year

5%

18000

900

past due

       

more than one

30%

7000

2100

year past due

Year -end balance ofallowance for doubtful accounts

$3,170

Allowance for Doubtfull accounts (cr.)balance

$1,020

Blue skies adds $2150 ($3170-$1020) tothe Allowance accounts. and makes thee folloeing entry: 31-Dec-08 Bad debts expense $2,150           Allowancefor Doubtful Accounts $2,150

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