Chapter 6, Problem 4P

Determining Bad Debt Expense Based on Aging Analysis (AP6-3)

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) 3 percent, (b) 9 percent, and (c) 28 percent, respectively.

At December 31, 2014 (end of the current accounting year), the Accounts Receivable balance was $48,700, and the Allowance for Doubtful Accounts balance was $920 (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	13,000		13,000
6/30/2013	Collection		3,000	10,000
1/31/2014	Collection		3,800	6,200
	D. Donalds—Account Receivable
2/28/2014	Sale	21,000		21,000
4/15/2014	Collection		8,000	13,000
11/30/2014	Collection		6,000	7,000
	N. Napier—Account Receivable
11/30/2014	Sale	8,000		8,000
12/15/2014	Collection		1,000	7,000
	S. Strothers—Account Receivable
3/2/2012	Sale	4,000		4,000
4/15/2012	Collection		4,000	-0-
9/1/2013	Sale	9,000		9,000
10/15/2013	Collection		4,500	4,500
2/1/2014	Sale	21,000		25,500
3/1/2014	Collection		5,000	20,500
12/31/2014	Sale	4,000		24,500
	T. Thomas—Account Receivable
12/30/2014	Sale	4,000		4,000

Required:

1. 1. Compute the total accounts receivable in each age category.
2. 2. Compute the estimated uncollectible amount for each age category and in total.
3. 3. Give the adjusting entry for bad debt expense at December 31, 2014.
4. 4. Show how the amounts related to accounts receivable should be presented on the 2014 income statement and balance sheet.