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Using an Aging Schedule to Account for Bad Debts

Sparkle Jewels distributes fine 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, 2017, 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		1,000

Required:

1. Prepare a schedule to estimate the amount of uncollectible accounts at December 31, 2017.

Sparkle Jewels Aging Schedule to Account for Bad Debts

Category	Amount	Estimated Percent Uncollectible	Estimated Amount Uncollectible
Current	$200,000	fill in the blank a76d29fef042fa3_1%	$fill in the blank a76d29fef042fa3_2
Past due:
Less than one month	45,000	fill in the blank a76d29fef042fa3_3%	fill in the blank a76d29fef042fa3_4
One to two months	25,000	fill in the blank a76d29fef042fa3_5%	fill in the blank a76d29fef042fa3_6
Over two months	1,000	fill in the blank a76d29fef042fa3_7%	fill in the blank a76d29fef042fa3_8
Totals	$271,000		$fill in the blank a76d29fef042fa3_9

2. On the basis of the schedule in part (1), identify and analyze the adjustment on December 31, 2017, to estimate bad debts.

Activity	FinancingInvestingOperating
Accounts	Allowance for Doubtful Accounts Increase, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense Decrease
Statement(s)	Balance Sheet onlyBalance Sheet and Income StatementIncome Statement only

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseBad Debts PayableNo Entry

fill in the blank 03f52a03201bfff_2

Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseSales RevenueNo Entry

fill in the blank 03f52a03201bfff_4

fill in the blank 03f52a03201bfff_5

Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseSales RevenueNo Entry

fill in the blank 03f52a03201bfff_7

Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseBad Debts PayableNo Entry

fill in the blank 03f52a03201bfff_9

fill in the blank 03f52a03201bfff_10

3. Show how accounts receivable would be presented on the December 31, 2017, balance sheet.

Sparkle Jewels Partial Balance Sheet December 31, 2017

Current Assets
Accounts receivableAllowance for doubtful accountsBad Debts ExpenseNet accounts receivable	$- Select -
Accounts receivableAllowance for doubtful accountsBad Debts ExpenseNet accounts receivable	- Select -
Accounts receivableAllowance for doubtful accountsBad Debts ExpenseNet accounts receivable		$- Select -