M. Beall Inc. uses the aging method to estimate the company’s bad debt expense.

Question

M. Beall Inc. uses the aging method to estimate the company’s bad debt expense. Mike Beall, the president of the company, collected information about the company’s outstanding accounts receivable and their probability of collection: Probability of Account Age Amount Non-Collection 0–30 days $725,000 0.50% 31–60 days 275,000 1.50% 61–90 days 170,000 2.50% 91–120 days 100,000 4.00% Over 120 days 40,000 20.00% Calculate the expected bad debt expense for M. Beall, Inc. Calculate the total balance in accounts receivable. Calculate the net realizable value of accounts receivable. Assume that the company decides to write-off all unpaid A/R over 120 days How does this impact Net Realizable value of accounts receivable? M. Beall Inc. uses the aging method to estimate the company’s bad debt expense. Mike Beall, the president of the company, collected information about the company’s outstanding accounts receivable and their probability of collection: Probability of Account Age Amount Non-Collection 0–30 days $725,000 0.50% 31–60 days 275,000 1.50% 61–90 days 170,000 2.50% 91–120 days 100,000 4.00% Over 120 days 40,000 20.00% Calculate the expected bad debt expense for M. Beall, Inc. Calculate the total balance in accounts receivable. Calculate the net realizable value of accounts receivable. Assume that the company decides to write-off all unpaid A/R over 120 days How does this impact Net Realizable value of accounts receivable?

Explanation / Answer

Account Age Amount probability of Non- collection Expected Amount of Bad debts 0-30 Days $7,25,000 0.50% $3,625 31-60 Days $2,75,000 1.50% $4,125 61-90 Days $1,70,000 2.50% $4,250 91-120 Days $1,00,000 4.00% $4,000 Over 120 Days $40,000 20.00% $8,000 Total $13,10,000 $24,000 Calculate the expected bad debt expense for M. Beall, Inc. $24,000 Calculate the total balance in accounts receivable. $13,10,000 Assume that the company decides to write-off all unpaid A/R over 120 days How does this impact Net Realizable value of accounts receivable? Accounts receivable - Balance $12,70,000 Less: Provision for Doubtful debts $16,000 Net receivable $12,54,000

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