Answer to Question #271227 in Economics for Lex

Question

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 Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for 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    .98

Between 16 and 30 days  100,000   .90

Between 31 and 45 days   80,000     .85

Between 46 and 60 days   40,000   .80

Between 61 and 75 days   20,000   .55

Over 75 days (to be written off)  15,000    .00

Instructions

a. What is the appropriate balance for Allowance for Doubtful Accounts at year-end.

b. Show how accounts receivable would be presented on the balance sheet.

c. What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Answer 1

a) $40,000-(300,000*.02+100,000*.1+80,000*.15+40,000*.2+20,000*.45+15,000) =-20,000$

b) Accounts Receivable $555,000-20,000=535,000$

Doubtful Accounts 0

c) income decreases