P7-3 (Bad-Debt Reporting—Aging) Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow's Accounts Receivable account
was $555,000 and the Allowance for Doubtful Accounts had a credit balance of
$40,000 The year-end balance reported in the balance sheet for the Allowance for Doubtful
Accounts will be based on the aging schedule shown below.
Days Account Outstanding Amount Probability of Collection
Less than 16 days $300,000 0.98
Between 16 and 30 days 100,000 0.90
Between 31 and 45 days 80,000 0.85
Between 46 and 60 days 40,000 0.80
Between 61 and 75 days 20,000 0.55
Over 75 days 15,000 0.00
(a) What is the appropriate balance for the Allowance for Doubtful Accounts at the year-end?
Days Account Outstanding Amount Probability of Collection Doubtful Accts:
0-15 days $300,000 0.98 Formula
16 - 30 days 100,000 0.90 Formula
31 - 45 days 80,000 0.85 Formula
46 - 60 days 40,000 0.80 Formula
61 - 75 days 20,000 0.55 Formula
Over 75 days 15,000 0.00 Formula
Enter text answer here.
(b) Show how Accounts Receivable would be presented on the balance sheet.
Account Title Amount
Less: Account Title Amount
Text Title Formula
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
Enter text answer as desired here.
Text Title Amount
Text explanation as required. Amount
Text Title Formula© BrainMass Inc. brainmass.com December 20, 2018, 11:28 am ad1c9bdddf
This solution illustrates how to correct errors caused by holding the cash book opened beyond year-end, how to compute the Allowance for Doubtful Accounts using an aging schedule, and the effect of adjusting the Allowance for Doubtful Accounts for an aging schedule.