Credit Losses Based on Accounts Receivable Graham, Inc., analyzed its accounts r

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Credit Losses Based on Accounts Receivable

Graham, Inc., analyzed its accounts receivable balances at December 31, and arrived at the aged balances listed below, along with the percentage that is estimated to be uncollectible:

The company handles credit losses using the allowance method. The credit balance of the Allowance for Doubtful Accounts is $1,040 on December 31, before any adjustments.

Prepare the adjusting entry for estimated credit losses on December 31.

Age Group
Balance Probability of
Noncollection 0-30 days past due $102,000 1% 31-60 days past due 20,000 3% 61-120 days past due 22,000 6% 121-180 days past due 9,000 10% Over 180 days past due 4,000 20% $157,000 a. General Journal Date Description Debit Credit Dec.31 Bad Debts Expense 0 Allowance for Doubtful Accounts 0 To record allowance for credit losses b. General Journal Date Description Debit Credit April 10 Allowance for Doubtful Accounts 680 0 Accounts Receivable - Matthews Company 680 To write off Matthews Company's account.

Explanation / Answer

a. Allowance for doubtful accounts are computed by multiplying total amount of each class group by an estimated percentage of uncollectible accounts.

The amount of adjusting entry is the difference between adjusted balances of allowance for doubtful accounts minus unadjusted balance of allowance for doubtful accounts.

The amount of the adjusting entry for uncollectible accounts is $3,600 which is journalized as under:

Age Group Balance Probability of Amount uncollectible Noncollection 0-30 days past due $ 102,000 1% $ 1,020 31-60 days past due 20,000 3% $ 600 61-120 days past due 22,000 6% $ 1,320 121-180 days past due 9,000 10% $ 900 Over 180 days past due 4,000 20% $ 800 $ 157,000 $ 4,640

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