# Blue Skies Equipment Company uses the aging approach to estimate bad debt expense at the end of...

## Question:

Blue Skies Equipment Company uses the aging approach to estimate bad debt expense at the end of each accounting year. Credit sales occur frequently on terms n/60. The balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, (2) up to one year past due, and (3) more than one year past due. Experience has shown that for each age group, the average loss rate on the amount of the receivable at year-end due to uncollectibility is (a) 9 percent, (b) 7 percent, and (c) 32 percent, respectively.

At December 31, 2014 (end of the current accounting year), the Accounts Receivable balance was $50,800, and the Allowance for Doubtful Accounts balance was$970 (credit). In determining which accounts have been paid, the company applies collections to the oldest sales first. To simplify, only five customer accounts are used; the details of each on December 31, 2014, follow:

B. Brown-Account Receivable

Date Explanation Debit Credit Balance
3/11/2013 Sale 13,200 13,200
6/30/2013 Collection 4,700 8,500
1/31/2014 Collection 4,700 3,800

D. Donalds-Account Receivable

Date Explanation Debit Credit Balance
02/28/2014 Sale 22,700 22,700
04/15/2014 Collection 7,800 14,900
11/30/2014 Collection 4,400 10,500

N. Napier-Account Receivable

Date Explanation Debit Credit Balance
11/30/2014 Sale 8,100 8,100
12/15/2014 Collection 2,700 5,400

S. Strothers-Account Receivable

Date Explanation Debit Credit Balance
03/02/2012 Sale 4,200 4,200
04/15/2012 Collection 4,200 0
09/01/2013 Sale 10,500 10,500
10/15/2013 Collection 3,700 6,800
02/01/2014 Sale 22,700 29,500
03/01/2014 Collection 7,500 22,000
12/31/2014 Sale 3,500 25,500

T. Thomas-Account Receivable

Date Explanation Debit Credit Balance
12/30/2014 Sale 5,600 5,600

1. Compute the total accounts receivable in each age category.

2. Compute the estimated uncollectible amount for each age category and in total.

3. Prepare journal entry for bad debt expense at December 31, 2014.

4. Show how the amounts related to accounts receivable should be presented on the 2014 income statement and balance sheet.

## Accounts Receivable

Accounts Receivable is one of the most common assets in the financial statements, under the balance sheet. This are short term in nature and commonly composed of the service and goods delivered on account. Accounts receivable are reported net of allowance for uncolletible accounts.

To answer each question, we need to first categorize each receivable by computing their age as follows:

Name Date of Sale Receivable Amount Age in Days Category
Brown 03/11/2013 3,800 660 (3) more than one year past due
Donald 02/28/2014 10,500 306 (2) up to one year past due
Napier 11/30/2014 5,400 31 (1) not yet due
Strothers 12/31/2014 3,500 0 (1) not yet due
Strothers 02/01/2014 22,000 333 (2) up to one year past due
Thomas 12/30/2014 5,600 1 (1) not yet due
Total 50,800

1. Total accounts receivable in each age category is as follows

Category Amount
(1) not yet due 14,500
(2) up to one year past due 32,500
(3) more than one year past due 3,800
Total 50,800

2. Estimated uncollectible amount for each age category and in total is computed as follows;

Category Amount Uncollectibility rate Estimated Uncollectible Amount
(1) not yet due 14,500 9% 1,305
(2) up to one year past due 32,500 7% 2,275
(3) more than one year past due 3,800 32% 1,216
Total 50,800 4,796

3. Journal entry for bad debt expense at December 31, 2014 is as follows:

Accounts Debit Credit

Bad debts expense is computed as follows:

 Desired allowance 4,796 Credit balance before adjustment 970 Bad debts expense 3,826

4. The amounts related to accounts receivable should be presented on the 2014 income statement and balance sheet as follows:

Account Amount
Income Statement:
Balance Sheet
Accounts Receivable 50,800
Less: Allowance for Bad debts 4,796
Net Accounts Receivable 46,004