ACCT 201 Principles of Financial Accounting
Practice Examination
Combined Chapters 5-8
Dr. Fred Barbee

Solution to Short-Problem #2

Short Problem #2

A company has the following unadjusted account balances at December 31 of the current year. Accounts Receivable of $185,700 and Allowance for Doubtful Accounts of $1,600 (credit balance). This company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule reflects its accounts receivable at the current year-end:

Account Age
Age Group
Balance
Estimated
Uncollectible
Percentage
Current (not yet due)
$96,000
1.5%
1-30 days past due
64,000
4.0
31-60 days past due
16,000
10.0
61-90 days past due
6,400
40.0
Over 90 days past due
3,200
65.0
Total
$185,600
 

Required:

  1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the December 31 of the current year balance sheet.

  2. Prepare the adjusting journal entry to record bad debts expense for the current year.

Solution - Part 1

Calculate Target Balance for Allowance Account
$96,000 x 0.015
=
$1,440
64,000 x .04
=
2,560
16,000 x .10
=
1,600
6,400 x .40
=
2,560
3,200 x .65
=
2,080
Total
 
$10,240

Solution - Part 2

Journal Entry to Record Debt Expense
Bad Debt Expense
8,640
 
Allowance for Doubtful Accounts
 
8,640

Calculation of Bad Debt Expense
Desired balance in allowance account (Credit):
$10,240
Current balance in allowance account (Credit):
1,600
Amount of adjustment (Credit)
$8,640