Chatter Corporation operates in an industry that has a high rate of bad debts. B
ID: 2462822 • Letter: C
Question
Chatter Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Chatter’s accounts receivable account is $556,000, and the allowance for doubtful accounts has a debit balance of $5,000. The year-end balance reported in the balance sheet for the allowance for doubtful accounts will be based on the aging schedule shown here:
Days Account Outstanding
Amount
Probability of Collection
Less than 16 days
$293,000
.97
Between 16 and 30 days
102,000
.89
Between 31 and 45 days
70,000
.83
Between 46 and 60 days
55,000
.76
Between 61 and 75 days
28,000
.60
Over 75 days
8,000
.30
What is the appropriate balance for the allowance for doubtful accounts at year end?
Show how accounts receivable would be presented on the balance sheet.
What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
Days Account Outstanding
Amount
Probability of Collection
Less than 16 days
$293,000
.97
Between 16 and 30 days
102,000
.89
Between 31 and 45 days
70,000
.83
Between 46 and 60 days
55,000
.76
Between 61 and 75 days
28,000
.60
Over 75 days
8,000
.30
Explanation / Answer
Solution.
Days Account Outstanding Amount Probability of Collection Amount collected Amount uncollected Less than 16 days 293,000 0.97 284,210 8,790 Between 16 and 30 days 102,000 0.89 90,780 11,220 Between 31 and 45 days 70,000 0.83 58,100 11,900 Between 46 and 60 days 55,000 0.76 41,800 1,320 Between 61 and 75 days 28,000 0.60 16,800 11,200 Over 75 days 8,000 0.30 2,400 5,600 Total Uncollectable 50,030.00