Using an Aging Schedule to Account for Bad Debts Sparkle Jewels distributes fi ne stones. It sells on credit to retail jewelry stores and extends terms that require the stores to pay in 60 days. For accounts that are not overdue, Sparkle has found that there is a 95% probability of collection. For accounts up to one month past due, the likelihood of collection decreases to 80%. If accounts are between one and two months past due, the probability of collection is 60%, and if an account is over two months past due, Sparkle Jewels estimates only a 40% chance of collecting the receivable.

On December 31, 2010, the balance in Allowance for Doubtful Accounts is $12,300.

The amounts of gross receivables by age on this date are as follows:

Category Amount Current $200,000 Past due:

Less than one month 45,000 One to two months 25,000 Over two months 1000 Required 1. Prepare a schedule to estimate the amount of uncollectible accounts at December 31, 2010.

2. On the basis of the schedule in (1), identify and analyze the adjustment on December 31, 2010, to estimate bad debts.

3. Show how accounts receivable would be presented on the December 31, 2010, balance sheet.

AppendixLO1