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Aging of Receivables; Estimating Allowance for Doubtful Accounts Wig Creations Company supplies wigs and hair care...

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.

Homework Answers

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
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