QUESTION FOUR (17 marks)
Beautiful Image, a firm specializing in marketing and publicity services, uses the balance sheet approach to estimate bad debts expense. At year-end an aging of the accounts
receivable produced the following classification:
1-30 days past due 135,000
31-60 days past due 58,500
61-90 days past due 13,500
Over 90 days past due 22,500
On the basis of past experience, the company estimated the percentages probably uncollectible
for the above five age groups to be as follows: Group 1, 1%; Group 2, 3%; Group 3, 10%;
Group 4, 20%; Group 5, 50%.
The Allowance for Doubtful Accounts before adjustment at December 31 (year-end date) showed
a credit balance of $8,100.
a) Compute the estimated amount of uncollectible accounts based on the above classification by age groups. (6 marks)
b) Prepare the adjusting journal entry needed (in part (a)) to bring the Allowance for Doubtful Accounts to the proper balance. (3 marks)
c) Assuming the balance in the Allowance for Doubtful Accounts at December 31 was $5,000 debit, prepare the adjusting journal entry needed to bring the Allowance for Doubtful Accounts to the proper balance. (5 marks)
d) Assume that on January 10 of the following year, Beautiful Image learned that an account receivable that had originated on September 1 in the amount of $8,550 was worthless because of the bankruptcy of the customer, Cranston Manufacturing. Prepare the journal entry required on January 10th to write off this account. (3 marks)