Chapter 6, Problem 6.21E

Recording, Reporting, and Evaluating a Bad Debt Estimate Using Aging Analysis

Brown Cow Dairy uses the aging approach to estimate bad debt expense. The ending balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, $14,000; (2) up to 120 days past due, $4,500; and (3) more than 120 days past due. $2,500. Experience has shown that for each age group, the average loss rate on the amount of the receivables at year-end due to uncollectibility is (1) 2 percent, (2) 12 percent, and (3) 30 percent, respectively. At December 31 (end of the current year), the Allowance for Doubtful Accounts balance is $800 (credit) before the end-of-period adjusting entry is made Data during the current year follow:

1. a. During December, an Account Receivable (Patty’s Bake Shop) of $750 from a prior sale was determined to it uncollectible; therefore, it was written off immediately as a bad debt.
2. b. On December 31, the appropriate adjusting entry for the year was recorded.

Required:

1. 1. Give the required journal entries for the two items listed above.
2. 2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the income statement and balance sheet for the current year. Disregard income tax considerations.
3. 3. On the basis of the data available, does the estimate resulting from the aging analysis appear to be reasonable? Explain.