Paisley Corporation operates in an industry that has a high rate of bad debts. T
ID: 2522366 • Letter: P
Question
Paisley Corporation operates in an industry that has a high rate of bad debts. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below:
Days Account Outstanding
Amount
Probability of Not Collecting
Less than 16 days
$351,600
.03
Between 16 and 30 days
122,400
.11
Between 31 and 45 days
84,000
.17
Between 46 and 60 days
66,000
.24
Between 61 and 75 days
33,600
.40
Over 75 days
$ 9,600
.70
Before year-end adjustments, Chatter’s Allowance for Doubtful Accounts had a debit balance of $6,000.
What is the appropriate balance for the Allowance for Doubtful Accounts at year-end?
Show how accounts receivable would be presented on the balance sheet.
What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
Days Account Outstanding
Amount
Probability of Not Collecting
Less than 16 days
$351,600
.03
Between 16 and 30 days
122,400
.11
Between 31 and 45 days
84,000
.17
Between 46 and 60 days
66,000
.24
Between 61 and 75 days
33,600
.40
Over 75 days
$ 9,600
.70
Explanation / Answer
a Days Account Outstanding Amount Probability of Not Collecting Allowance Less than 16 days 351600 0.03 10548 Between 16 and 30 days 122400 0.11 13464 Between 31 and 45 days 84000 0.17 14280 Between 46 and 60 days 66000 0.24 15840 Between 61 and 75 days 33600 0.4 13440 Over 75 days 9600 0.7 6720 Total 667200 74292 Allowance for Doubtful Accounts at year-end=$74292 b Current assets: Accounts Receivable 667200 Less: Allowance for Doubtful Accounts 74292 Accounts Receivable - Net 592908 c Dollar effect of the year-end bad debt adjustment = 74292+6000 = $80292
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