Huron Corp. operates in an industry that has a high rate of bad debts. On Dec.31, before any year end adjustments, the balance in Huron’s Accounts Receivable acct. was $75,000 and the Allowance for Doubtful Acct. had a balance of $37,500. The year-end balance reported in the statement of financial position for the Allowance for Doubtful Acct. will be based on the aging schedule shown below.
DAYS ACCT. OUTSTANDING AMOUNT PROBABILITY OF COLLECTION
less than 16 $450,000 .99
16 to30 150,000 .94
31 to 45 75,000 .80
46 to 60 45,000 .65
61 to 75 15,000 .50
Over 75 15,000 .00
A. What is the appropriate balance for the Allowance for Doubtful Accounts on Dec. 31?
B. Show how accounts receivable would be presented on the balance sheet prepared on
C. What is the dollar effect of the year-end bad debt adjustment on the before tax income for the year?
The Allowance for Doubtful Accounts should have a balance of $51,750 on December 31. The supporting calculations are shown below:
Days Account Outstanding
Amount Expected Percentage Uncollectible* Estimated Uncollectible
0-15 days $450,000 .01 $ 4,500
16-30 days 150,000 .06 9,000
31-45 days 75,000 .20 15,000
46-60 days 45,000 .35 15,750
61-75 15,000 .50 7,500
Balance for Allowance for Doubtful Accounts $51,750
*(1-Probability of collection.)
The accounts that have been outstanding over 75 days ($15,000) and have zero probability of collection would be written off immediately and not be considered when determining the proper amount of the Allowance for Doubtful Accounts.
Accounts Receivable $735,000
Less: Allowance for Doubtful Accounts 51,750
Net Accounts Receivable $683,250
c. The year-end bad debt adjustment would decrease the year’s before-tax income by $29,250, as shown
Estimated amount required in the Allowance for Doubtful
Balance in the account after write-off of bad accounts but before
Required charge to expense $29,250