Question

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Blue Skies Equipment Company uses the aging approach to estimate bad debt expense at the end of each accounting year. Credit sales occur frequently on terms n/60. The balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, (2) up to one year past due, and (3) more than one year past due. Experience has shown that for each age group, the average loss rate on the amount of the receivable at year-end due to uncollectibility is (a) 9 percent, (b) 7 percent, and (c) 32 percent, respectively.

At December 31, 2014 (end of the current accounting year), the Accounts Receivable balance was $50,800, and the Allowance for Doubtful Accounts balance was $970 (credit). In determining which accounts have been paid, the company applies collections to the oldest sales first. To simplify, only five customer accounts are used; the details of each on December 31, 2014, follow:

B. Brown—Account Receivable
Date	Explanation	Debit	Credit	Balance
3/11/2013	Sale	13,200		13,200
6/30/2013	Collection		4,700	8,500
1/31/2014	Collection		4,700	3,800

D. Donalds—Account Receivable
Date	Explanation	Debit	Credit	Balance
02/28/2014	Sale	22,700		22,700
04/15/2014	Collection		7,800	14,900
11/30/2014	Collection		4,400	10,500

N. Napier—Account Receivable
Date	Explanation	Debit	Credit	Balance
11/30/2014	Sale	8,100		8,100
12/15/2014	Collection		2,700	5,400

S. Strothers—Account Receivable
Date	Explanation	Debit	Credit	Balance
03/02/2012	Sale	4,200		4,200
04/15/2012	Collection		4,200	0
09/01/2013	Sale	10,500		10,500
10/15/2013	Collection		3,700	6,800
02/01/2014	Sale	22,700		29,500
03/01/2014	Collection		7,500	22,000
12/31/2014	Sale	3,500		25,500

T. Thomas—Account Receivable
Date	Explanation	Debit	Credit	Balance
12/30/2014	Sale	5,600		5,600

1. Compute the total accounts receivable in each age category.

2. Compute the estimated uncollectible amount for each age category and in total.

3. Prepare journal entry for bad debt expense at December 31, 2014. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

4. Show how the amounts related to accounts receivable should be presented on the 2014 income statement and balance sheet. (Amounts to be deducted should be indicated by a minus sign.)

Answer 1

1 & 2) Accounts Receivables and age-wise category:
	Amount due	Uncollectible
Not Due:		9%
N.Napier	5400
S.Strothers	3500
T.Thomas	5600
Total	14500	1305
Due less than one year:		7%
D.Donalds	10500
S.Strothers	22000
Total	32500	2275
Due over more than one year:		32%
B. Brown	3800
Total	3800	1216
Total Uncollectible amount	50800	4796
3) Bad debt expense journal entry:
	Debit $	Credit $
Bad Debt Expense	3826
Allowance for Doubtful Accounts		3826
(4796 - 970)
4) Treatment in Income Statement and balance sheet 2014:
Income Statement :
Expense : Bad Debt : 3826
Balance Sheet :
Assets : Accounts Receivable : $50800
Liabilities : Allowance for Doubtful Accounts : $4796