Q2. Aging Accounts Receivable; Write-offs

Moonglow, a Broadway Publicity firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year-end an aging of the accounts receivable produced the following classification:

Not yet due $400,000

1-30 days past due 150,000

31-60 days past due 60,000

61-90 days past due 20,000

Over 90 days past due 50,000

Total $680,000

On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group 1, 1%; Group 2, 4%; Group 3, 10%; Group 4, 25%; and Group 5, 40%

The Allowance for Doubtful Accounts before adjustments at December 31 showed a credit balance of $6,600.

Instructions

Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount.

Assume that on January 15 of the following year, Moonglow learned that an account receivable that had originated on September 1 in the amount of $2,400 was worthless because of the bankruptcy of the client, May Flowers. Prepare the journal entry required on January 15 to write off this account.

The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest-bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?