Question

Company ABC had credit sales of $400,000 during the month of July. At the end of July, an examination into their A/R showed that the total balance was $350,000 broken down as follows: Current $200,000 1-30 Days Past Due 80,000 31-60 Days Past Due. 40,000 61-90 Days Past Due 20,000 Greater Than 90 Days 10,000 The expectations, based on analysis of historical A/R is that 99% of the current A/R is collectible, 90% of the 1-30 days, 80% of the 31-60 days, 60% of the 61-90 days and 20% of the greater than 90 days. If ABC uses the percentage of sales methodology of providing for bad debts, the estimate is used is 10% of credit sales are uncollectible.assume the current balance in the Allowance for Doubtful Accounts is a $5,000 Credit.

1.If ABC uses the Percentage of Sales Methodology of providing for bad debt expense, what would be the increase to Bad Debt Expense as a result of July Sales?
2.If ABC uses the Percentage of Sales Methodology of providing for bad debt expense, what is the balance in the Allowance for Doubtful Accounts AFTER the bad debt expense entry in July?

Answer 1

The increase to Bad Debt Expense as a result of July Sales would be $316,000. The balance in the Allowance for Doubtful Accounts after the bad debt expense entry in July would be $0.

Step-by-step explanation:

To calculate the increase to Bad Debt Expense as a result of July Sales using the Percentage of Sales Methodology, we need to start by calculating the estimated bad debt percentage for each category of past-due accounts. Here is the breakdown:

1. Current: 99% collectible (200,000 * 0.99 = 198,000)
2. 1-30 Days Past Due: 90% collectible (80,000 * 0.90 = 72,000)
3. 31-60 Days Past Due: 80% collectible (40,000 * 0.80 = 32,000)
4. 61-90 Days Past Due: 60% collectible (20,000 * 0.60 = 12,000)
5. Greater Than 90 Days: 20% collectible (10,000 * 0.20 = 2,000)

Next, we need to calculate the total estimated bad debt amount by adding up the estimated bad debt for each category: (198,000 + 72,000 + 32,000 + 12,000 + 2,000 = 316,000).

Therefore, the increase to Bad Debt Expense as a result of July Sales would be $316,000.

To calculate the new balance in the Allowance for Doubtful Accounts after the bad debt expense entry in July, we need to subtract the estimated bad debt amount from the previous balance. Previous balance - Bad debt expense = (5,000 - 316,000 = -311,000). However, a negative balance in the allowance is not possible according to the question, so the balance would be $0.