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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, 20Y1:

Days Past Due
Customer Balance Not Past Due 1-30 31-60 61-90 91-120 over 120
Subtotals 661,200 367,000 158,700 72,700 24,500 21,800 16,500

The following accounts were unintentionally omitted from the aging schedule:

Customer Due Date Balance
Arcade Beauty May 28, 20Y1 $2,700
Creative Images Sept. 7, 20Y1 5,700
Excel Hair Products Oct. 17, 20Y1 800
First Class Hair Care Oct. 24, 20Y1 1,900
Golden Images Nov. 23, 20Y1 600
Oh The Hair Nov. 29, 20Y1 3,200
One Stop Hair Designs Dec. 2, 20Y1 2,100
Visions Hair and Nail Jan. 5, 20Y2 6,900

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

Age Class Percent Uncollectible
Not past due 1 %
1-30 days past due 3
31-60 days past due 12
61-90 days past due 18
91-120 days past due 40
Over 120 days past due 80

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.

Customer Due Date Number of Days Past Due
Arcade Beauty May 28, 20Y1 days
Creative Images Sept. 7, 20Y1 days
Excel Hair Products Oct. 17, 20Y1 days
First Class Hair Care Oct. 24, 20Y1 days
Golden Images Nov. 23, 20Y1 days
Oh The Hair Nov. 29, 20Y1 days
One Stop Hair Designs Dec. 2, 20Y1 days
Visions Hair and Nail Jan. 5, 20Y2 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, 20Y1
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
Arcade Beauty
Creative Images
Excel Hair Products
First Class Hair Care
Golden Images
Oh The Hair
One Stop Hair Designs
Visions Hair and Nail
Total
Percent uncollectible 1% 3% 12% 18% 40% 80%
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 $1,780 before adjustment on December 31, 20Y1. Journalize the adjustment for uncollectible accounts.

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 owner’s capital account would be   by   because bad debt expense would be   and net income  

Homework Answers

Answer #1

1.

Customer Due Date Number of Days Past Due
Arcade Beauty May 28, 20Y1 217 days
Creative Images Sept. 7, 20Y1 115 days
Excel Hair Products Oct. 17, 20Y1 75 days
First Class Hair Care Oct. 24, 20Y1 68 days
Golden Images Nov. 23, 20Y1 38 days
Oh The Hair Nov. 29, 20Y1 32 days
One Stop Hair Designs Dec. 2, 20Y1 29 days
Visions Hair and Nail Jan. 5, 20Y2 0 days

2.

Wig Creations Company
Aging of Receivables Schedule
December 31, 20Y1
Days Past Due
Customer Balance Not Past Due 1-30 31-60 61-90 91-120 Over 120
Subtotals 661200.00 367000.00 158700.00 72700.00 24500.00 21800.00 16500.00
Arcade Beauty 2700.00 2700.00
Creative Images 5700.00 5700.00
Excel Hair Products 800.00 800.00
First Class Hair Care 1900.00 1900.00
Golden Images 600.00 600.00
Oh The Hair 3200.00 3200.00
One Stop Hair Designs 2100.00 2100.00
Visions Hair and Nail 6900.00 6900.00
Total 685100.00 373900.00 160800.00 76500.00 27200.00 27500.00 19200.00
Percent uncollectible 1% 3% 12% 18% 40% 80%
Estimate of uncollectible accounts 48999.00 3739.00 4824.00 9180.00 4896.00 11000.00 15360.00

3. Allowance for doubtful accounts: $48999

4.

Bad debt expense ($48999 - $1780) 47219
Allowance for doubtful accounts 47219

5. On the balance sheet, assets would be overstated by $47219 because the allowance for doubtful accounts would be understated by $47219. In addition, the owner's capital account would be overstated by $47219 because bad debt expense would be understated and net income overstated by $47219 on the income statement.

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