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 90% probability of collection. For accounts up to one month past due, the likelihood of collection decreases to 75%. 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, 2016, the credit balance in Allowance for Doubtful Accounts is $11,500. The amounts of gross receivables by age on this date are as follows:

Category	Amount
Current	$195,000
Past due:
Less than one month	44,300
One to two months	24,800
Over two months	1,400

Required:

1. Prepare a schedule to estimate the amount of uncollectible accounts at December 31, 2016.

Sparkle Jewels
Aging Schedule to Account for Bad Debts
Category	Amount	Estimated Percent Uncollectible	Estimated Amount Uncollectible
Current	$195,000
Past due:
Less than one month	44,300
One to two months	24,800
Over two months	1,400
Totals	$265,500

2. On the basis of the schedule in part (1), prepare the journal entry on December 31, 2016, to estimate bad debts. Indicate the effect on financial statement items by selecting "" for decrease (or negative effect), "+" for increase (or positive effect) and "NE" for No Entry (or no effect) on the financial statement.

Journal

Balance Sheet

Income Statement

Stockholders

Net

Date

Description

Debit

Credit

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

2016

Dec. 31

3. Show how accounts receivable would be presented on the December 31, 2016, balance sheet.

Sparkle Jewels
Partial Balance Sheet
Current Assets