Question

Outdoor living has the following accounts receivable at year end, broken down by age:

Current $150000

One month overdue. $40000

Two months overdue. $18000

Three months overdue. $8000

Prior experience has shown that the company will probably collect 95 per cent of its current receivables. Furthermore the collection percentage will fall by 15 per cent for each additional month an account receivable remains outstanding past its due date.

Develop an estimate of Outdoor livings allowance account balance and prepare the journal entry for bad debt expense, assuming that the allowance has an existing $4000 credit balance and $1000 debit balance.

Answer 1

Estimation of the outdoor allowance account balance is given as follows:

Age of the accounts receivable	Accounts receivable amount	Probability of not collecting	Expected uncollectible amount
Current	$150,000	(100-95%)5%	$7500
one month overdue	$40,000	20%(5%+15%)	$8000
Two month overdue	$18,000	35%(20%+15%)	$6300
Three month overdue	$8000	50%(35%+15%)	$4000
Total			$25,800

Now to compute the estimation of the bad debt expense to be made as follows:

Particulars	Amount($)
Total amount of uncollectible amount	25800
less:Current credit balance	4000
Bad debt account expense	21800

Journal entry

Account title and their explaination	post ref	Debit($)	Credit($)
Bad debt expense		21800
Uncollectible account allowance			21800
(for recording bad debt expense amount)