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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Aging of receivables; estimating allowance for doubtful accounts

Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 20Yl:

images

The following accounts were unintentionally omitted from the aging schedule:

Customer Due Date Balance
Arcade Beauty Aug 17, 20Y1 $10,000
Creative Images Oct. 30,20Y1 8,500
Excel Hair Products July 3,20 Y1 7,500
First Class Hair Care Sept. 8,20Y1 6,600
Golden Images Nov. 23, 20Y1 3,600
Oh That Hair Nov. 29, 20Y1 1,400
One Stop Hair Designs Dec. 7, 20Y1 4,000
Visions Hair & Nail Jan. 11, 20Y2 9,000

Wig Creations has a past history of uncollectible accounts by age category, as follows:

Age Class Percent Uncollectible
Not past due 1%
1 30 days past due 4
31-60 days past due 16
61-90 days past due 25
91-120 days past due 40
Over 120 days past due 80

Instructions

  1. 1. Determine the number of days past due for each of the preceding accounts.
  2. 2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
  3. 3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.
  4. 4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $7,375 before adjustment o n December 31, 20Yl. Journalize the adjustment for uncollectible accounts.
  5. 5. Assuming that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?

(1)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Due date:

Due date is the maturity date on note/account, on due date the borrower is supposed to pay the debt.

Past due:

Past due is the number of days of not receiving/making payment on the overdue account.

Analysis of receivables method:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.

To determine: The number of days each account is past due as of December 31, 20Y1.

Explanation

Determine the number of days each account is past due as of December 31, 20Y1.

Account Due Date Number of days past due
A Beauty August 17, 20Y1 136 days
C Images October 30, 20Y1 62 days
EH products July 3, 20Y1 181 days
FCH Care September 8, 20Y1 114 days
G Images November 23, 20Y1 38 days
OT Hair November 29, 20Y1 32 days
OSH Designs December 7, 20Y1 24 days
V Hair & Nail January 11, 20Y2 Not past due

Table (1)

Working note:

Calculate number of days past due for each account.

A Beauty Past due days
Number of days from August 18 to 31 14 days
Number of days from September 1 to 30 30 days
Number of days from October 1 to 31 31 days
Number of days from November 1 to 30 30 days
Number of days from December 1 to 31 31 days
Total 136 days

Table (2)

C Images Account Past due days
Number of days from October 31 1 days
Number of days from November 1 to 30 30 days
Number of days from December 1 to 31 31 days
Total 62 days

Table (3)

EH products Account Past due days
Number of days from July 4 to 31 28 days

(2)

To determine

To complete: The aging of receivables schedule, by adding the omitted accounts to the bottom of the schedule and update the totals.

(3)

To determine

To prepare: An estimate for allowance for doubtful accounts, on the basis of aging of receivables schedule.

 (4)

To determine

To Journalize: The adjusting entry for uncollectible accounts.

(5)

To determine

To identify: The effect on the balance sheet and income statement, if adjusting entry is omitted unintentionally.

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