Outdoor living has the following accounts receivable at year end, broken down by

Question

Outdoor living has the following accounts receivable at year end, broken down by age:

Current $150000

One month overdue. $40000

Two months overdue. $18000

Three months overdue. $8000

Prior experience has shown that the company will probably collect 95 per cent of its current receivables. Furthermore the collection percentage will fall by 15 per cent for each additional month an account receivable remains outstanding past its due date.

Develop an estimate of Outdoor livings allowance account balance and prepare the journal entry for bad debt expense, assuming that the allowance has an existing $4000 credit balance and $1000 debit balance.

Explanation / Answer

Estimation of the outdoor allowance account balance is given as follows:

Now to compute the estimation of the bad debt expense to be made as follows:

Journal entry

Age of the accounts receivable Accounts receivable amount Probability of not collecting Expected uncollectible amount Current $150,000 (100-95%)5% $7500 one month overdue $40,000 20%(5%+15%) $8000 Two month overdue $18,000 35%(20%+15%) $6300 Three month overdue $8000 50%(35%+15%) $4000 Total $25,800

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