1st Edition

ISBN: 9780132162302

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Textbook Question

Chapter 7, Problem 7.14P

Expected Cash Flows. Hiteck Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the bad debt allowance needed to cover the notes outstanding over the next four years. Estimated lost cash flows and the probability of occurrence for each of the next four years are summarized in the following schedule. The risk-free rate is 8%.

Year

Projected Cash Flow Loss from Uncollected Notes

Probability of Loss Occurring

2019

$ 8,000

18,000

90%

10%

2020

$10,000

22,000

45,000

15%

70%

15%

2021

$ 6,000

14,000

85%

15%

2022

$26,000

35,000

50%

What is the estimated bad debt allowance at December 31, 2018?

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Chapter 7, Problem 7.13P

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Solution Summary: The author explains that the estimated bad debt allowance at December 31, 2018 is 56,743.46.

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