Chapter 6, Problem 6.3AP

Determining Bad Debt Expense Based on Aging Analysis (P6-3)

LO6-2 Briggs & Stratton Engines Inc. uses the aging approach to estimate bad debt expense at the end of each accounting year. Credit sales occur frequently on terms n/45. The balance of each account receivable is aged on the basis of four time periods as follows: (1) not yet due, (2) up to 6 months past due, (3) 6 to 12 months past due, and (4) more than one year past due. Experience has shown that for each age group, the average loss rate on the amount of the receivable at year-end due to uncollectibility is (a) 1 percent, (b) 5 percent, (c) 20 percent, and (d) 50 percent, respectively.

At December 31, 2014 (end of the current accounting year), the Accounts Receivable balance was $39,500, and the Allowance for Doubtful Accounts balance was $1,550 (credit). In determining which accounts have been paid, the company applies collections to the oldest sales first. To simplify, only five customer accounts are used; the details of each on December 31, 2014, follow:

Date	Explanation	Debit	Credit	Balance
	R. Devens—Account Receivable
3/13/2014	Sale	19,000		19,000
5/12/2014	Collection		10,000	9,000
9/30/2014	Collection		7,000	2,000
	C. Howard—Account Receivable
11/01/2013	Sale	31,000		31,000
06/01/2014	Collection		20,000	11,000
12/01/2014	Collection		5,000	6,000
	D. McClain—Account Receivable
10/31/2014	Sale	12,000		12,000
12/10/2014	Collection		8,000	4,000

T. Skibinski—Account Receivable
05/02/2014	Sale	15,000		15,000
06/01/2014	Sale	10,000		25,000
06/15/2014	Collection		15,000	10,000
07/15/2014	Collection		10,000	0
10/01/2014	Sale	26,000		26,000
11/15/2014	Collection		16,000	10,000
12/15/2014	Sale	4,500		14,500
	H. Wu—Account Receivable
12/30/2014	Sale	13,000		13,000

Required:

1. 1. Compute the total accounts receivable in each age category.
2. 2. Compute the estimated uncollectible amount for each age category and in total.
3. 3. Give the adjusting entry for bad debt expense at December 31, 2014.
4. 4. Show how the amounts related to accounts receivable should be presented on the 2014 income statement and balance sheet.