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:

Question Content Area

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

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

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.

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