Question

Aging of Receivables; Estimating Allowance for Doubtful Accounts

Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 20Y7:

  NotDays Past Due

  Past    

CustomerBalanceDue1-3031-6061-9091-120Over 120

ABC Beauty19,900 19,900           

Angel Wigs7,600     7,600       

Zodiac Beauty4,500   4,500         

Subtotals1,315,600 759,500 289,900 123,000 40,900 19,200 83,100

The following accounts were unintentionally omitted from the aging schedule. Assume all due dates are for the current year except for Visions Hair & Nail, which is due in the next year.

CustomerDue DateBalance

Arcade Beauty Aug. 17$5,400

Creative Images Oct. 305,300

Excel Hair Products July 38,800

First Class Hair Care Sept. 86,800

Golden Images Nov. 233,200

Oh That Hair Nov. 292,700

One Stop Hair Designs Dec. 76,500

Visions Hair & Nail Jan. 114,500

Wig Creations has a past history of uncollectible accounts by age category, as follows:

Age ClassPercent Uncollectible

Not past due1%

1-30 days past due2

31-60 days past due11

61-90 days past due30

91-120 days past due42

Over 120 days past due85

Required:

1. Determine the number of days past due for each of the preceding accounts. If an account is not past due, enter a zero.

CustomerDue DateNumber of Days Past Due

Arcade BeautyAug. 17 days

Creative ImagesOct. 30 days

Excel Hair ProductsJuly 3 days

First Class Hair CareSept. 8 days

Golden ImagesNov. 23 days

Oh That HairNov. 29 days

One Stop Hair DesignsDec. 7 days

Visions Hair & NailJan. 11 days

2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals. If an amount box does not require an entry, leave it blank.

Wig Creations Company

Aging of Receivables Schedule

December 31, 20Y7

Customer

BalanceNot Past
DueDays Past
Due 1-30Days Past
Due 31-60Days Past
Due 61-90Days Past
Due 91-120Days Past
Due Over 120

ABC Beauty19,90019,900     

Angel Wigs7,600  7,600   

        

Zodiac Beauty4,500 4,500    

Subtotals1,315,600759,500289,900123,00040,90019,20083,100

Arcade Beauty

Creative Images

Excel Hair Products

First Class Hair Care

Golden Images

Oh That Hair

One Stop Hair Designs

Visions Hair & Nail

Totals

Percent uncollectible (%)%%%%%%

Estimate of uncollectible accounts$$$$$$$

3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.
$

4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $4,700 before adjustment on December 31, 20Y7. Journalize the adjustment for uncollectible accounts. If an amount box does not require an entry, leave it blank.

Dec. 31

5. Assume that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?

On the balance sheet, assets would be   by $ because the allowance for doubtful accounts would be   by $. In addition, the stockholders’ equity (retained earnings) would be   by $ because bad debt expense would be   and net income   by $ on the income statement.

Answer 1

1	Number of days past due=Days after due date till Dec 31
	Customer		Due date	Number of days past due
	Arcade beauty		Aug 17.	136	days
	Creative images		Oct 30.	62	days
	Excel hair products		July 3.	181	days
	First class hair care		Sept 8.	114	days
	Golden images		Nov. 23	38	days
	Oh that hair		Nov. 29	32	days
	One stop hair designs		Dec. 2	29	days
	Visions hair & nail		Jan. 5	Not yet due
	(Due in next year)
2			Aging of receivables schedule
	Customer		Balance	Not past due	Days past due 1-30	Days past due 31-60	Days past due 61-90	Days past due 91-120	Days past due over 120
	Subtotals		1315600	759500	289900	123000	40900	19200	83100
	Arcade beauty		5400						5400
	Creative images		5300				5300
	Excel hair products		8800						8800
	First class hair care		6800					6800
	Golden images		3200			3200
	Oh that hair		2700			2700
	One stop hair designs		6500		6500
	Visions hair & nail		4500	4500
	Totals                                                       a		1358800	764000	296400	128900	46200	26000	97300
	Percent uncollectible                      b			1%	2%	11%	30%	42%	85%
	Estimate of uncollectible accounts (a*b)			7640	5928	14179	13860	10920	82705
3	Estimated allowance for doubtful accounts=7640+5928+14179+13860+10920+82705=$ 135232
4	Estimated allowance for doubtful accounts=$ 135232
	Current balance in allowance for doubtful accounts=$ 4700
	Bad debt expense to be recognized=135232-4700=$ 130532
	Date	Particulars	Debit	Credit
	Dec 31.	Bad debt expense	130532
		Allowance for doubtful accounts		130532
5	On the balance sheet,assets would be overstated by $ 130532 because the allowance for doubtful accounts would be understated by $ 130532.
	In addition,the stockholder's equity (retained earnings) would be overstated by $ 130532 because bad debt expense would be understated and net income overstated by $ 130532 on the income statement