Problem 2. Bad-Debt Reporting Allowance Method Aging of Accounts Receivables (1.2 content area)

Loan Corporation unfortunately has a high rate of bad debts. Before any year-end adjustments, the balance in Corps Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts showed a credit balance of $40,000 before the adjustment for bad debt. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts is based on the aging schedule shown below.

Probability of

Days Account Outstanding Amount Collection

Less than 16 days $300,000 .98

Between 16 and 30 days 100,000 .90

Between 31 and 45 days 80,000 .85

Between 46 and 60 days 40,000 .80

Over 61 days 35,000 .50

Instructions

2.1 What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

2.2 Prepare the journal entry(s) needed to adjust the balances to the correct amounts.

2.3 Show how the accounts receivable is presented on the balance sheet (hint: should be 3 lines).