Adventure Company uses the aging of accounts receivable method to estimate Bad D

Question

Adventure Company uses the aging of accounts receivable method to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three categories as follows: (1) 1-30 days old, (2) 30-90 days old, and (3) more than 90 days old. Based on experience, management has estimated what portion of receivables of a specific age will not be paid as follows: (1) 3%, (2) 13%, and (3) 35%, respectively. At December 31, 2016, the unadjusted credit balance in the Allowance for Doubtful Accounts was $290. The total Accounts Receivable in each age category were: (1) 1-30 days old, $62,000, (2) 30-90 days old, $18,000, and (3) more than 90 days old, $4,000.

Required:

Calculate the estimate of uncollectible accounts at December 31, 2016.

b. Prepare the appropriate adjusting entry dated December 31, 2016. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Journal Entry Worksheet:

1. December 31, 2016 - Record the adjusting entry on December 31, 2016.

Required:

Calculate the estimate of uncollectible accounts at December 31, 2016.

b. Prepare the appropriate adjusting entry dated December 31, 2016. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Journal Entry Worksheet:

1. December 31, 2016 - Record the adjusting entry on December 31, 2016.

Explanation / Answer

a.. Calculation for the estimate for the allowance for doubtful debts:-

1.. 1-30 days old- 62000*3%= 1860

2. 30-90 dayds old- 18000*13%= 2340

3. 90 days and above- 4000*35%= 1400

Total = 1860+2340+1400= 5600

b. Jounal Adjustment Entries to be passed on 31-Dec-2016:

1. Credit balance of $290 in Allowance for Doubtful Debts to be reversed

Allowance for Doubtful Debts account Dr. $290

To Profit and Loss Adjustment $290

2. Provison in current year 2016

Bad Debts Dr. $ 5600

To Allowance for Deboutful Debts $ 5600

Note: The consolidated entry will be as under:

Bad Debts Dr. $ 5600

To Allowance for Doubtful Debts $ 5310

To Profit and Loss Adjustment $ 290

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