Question

brown cow dairy uses the aging approach to estimate bad debt expense. the balance of each account receivable is aged on the basis of three time periods as follows: (1) 1 to 30 days old, $11,500; (2) 31 to 90 days old, $4,500; and (3) more than 90 days old, $2,500. for each age group, the average loss rate on the amount of the receivable due to uncollectibility is estimated to be (1) 5 percent, (2) 10 percent, and (3) 20 percent, respectively. at december 31 (end of the current year), the allowance for doubtful accounts balance was $750 (credit) before the end-of-period adjusting entry is made. required: prepare a schedule to estimate an appropriate year-end balance for the allowance for doubtful accounts. what amount of bad debt expense should be recorded on december 31? if the unadjusted balance in the allowance for doubtful accounts was a $550 debit balance, what amount of bad debt expense should be recorded on december 31?

Answer 1

To estimate the appropriate year-end balance for the allowance for doubtful accounts, calculate the estimated loss for each age group of accounts receivable and total them up. If the unadjusted balance in the allowance for doubtful accounts is a debit balance, adjust it to a credit balance by adding the amount of bad debt expense.

Step-by-step explanation:

To estimate the appropriate year-end balance for the allowance for doubtful accounts, we need to calculate the estimated loss for each age group of accounts receivable and then total them up. We'll multiply the balance of each age group by the average loss rate for that group.

For example, for the 1 to 30 days old group, the estimated loss would be 5% of $11,500, which is $575. We'll do the same calculation for the other two groups and then add up the total losses. In this case, the estimated year-end balance for the allowance for doubtful accounts would be $575 + $450 + $500, which is $1,525.

If the unadjusted balance in the allowance for doubtful accounts was a $550 debit balance, we need to adjust it to a credit balance by adding the amount of bad debt expense. In this case, the bad debt expense would be $1,525 - $550, which is $975. Therefore, $975 should be recorded as bad debt expense on December 31.