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Chapter 9: Problem 11

Fonda Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company's accounts receivable on December 31, 2010, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows: \begin{tabular}{lrc} Age Interval & Balance & Percent Uncollectible \\ \hline Not past due & \(\$ 567,000\) & \(1 / 2 \%\) \\ \(1-30\) days past due & 58,000 & 3 \\ \(31-60\) days past due & 29,000 & 7 \\ \(61-90\) days past due & 20,500 & 15 \\ \(91-180\) days past due & 15,000 & 40 \\ Over 180 days past due & 10,500 & 75 \\ \cline { 2 - 3 } & \(\$ 700,000\) & \end{tabular} Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31, 2010 .

Short Answer

Expert verified
The proper balance of the allowance for doubtful accounts should be \( \$23,555 \).

Step by step solution

01

Calculate Uncollectible Amount for Not Past Due Accounts

The balance for accounts that are not past due is \( \\(567,000 \) with an uncollectible rate of \( 0.5\% \). To calculate the uncollectible amount, multiply the balance by the percentage: \[ 567,000 \times 0.005 = \\)2,835 \]
02

Calculate Uncollectible Amount for 1-30 Days Past Due Accounts

The balance for accounts that are 1-30 days past due is \( \\(58,000 \) with an uncollectible rate of \( 3\% \). Multiply the balance by the percentage:\[ 58,000 \times 0.03 = \\)1,740 \]
03

Calculate Uncollectible Amount for 31-60 Days Past Due Accounts

The balance for accounts that are 31-60 days past due is \( \\(29,000 \) with an uncollectible rate of \( 7\% \). Multiply the balance by the percentage:\[ 29,000 \times 0.07 = \\)2,030 \]
04

Calculate Uncollectible Amount for 61-90 Days Past Due Accounts

The balance for accounts that are 61-90 days past due is \( \\(20,500 \) with an uncollectible rate of \( 15\% \). Multiply the balance by the percentage:\[ 20,500 \times 0.15 = \\)3,075 \]
05

Calculate Uncollectible Amount for 91-180 Days Past Due Accounts

The balance for accounts that are 91-180 days past due is \( \\(15,000 \) with an uncollectible rate of \( 40\% \). Multiply the balance by the percentage:\[ 15,000 \times 0.40 = \\)6,000 \]
06

Calculate Uncollectible Amount for Over 180 Days Past Due Accounts

The balance for accounts over 180 days past due is \( \\(10,500 \) with an uncollectible rate of \( 75\% \). Multiply the balance by the percentage:\[ 10,500 \times 0.75 = \\)7,875 \]
07

Sum All Uncollectible Amounts to Find the Total Allowance

Sum the uncollectible amounts from each category to find the total allowance for doubtful accounts:\[2,835 + 1,740 + 2,030 + 3,075 + 6,000 + 7,875 = \$23,555\]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Accounts Receivable
Accounts receivable represents the outstanding invoices a company has, or money that clients owe the company. Often, this is a result of sales made on credit with the understanding that the payment will be made at a later date. For a business like Fonda Bikes Co., accounts receivable could include payments due from distributors or retailers that are yet to be received for motorcycles supplies purchased.
Understanding accounts receivable is crucial for managing a business's cash flow effectively. They are listed as a current asset on the balance sheet because they are usually to be paid within a short time period. It's important to monitor these closely to ensure funds are available to meet the company鈥檚 obligations. Neglect in this area could lead to cash flow issues or worse, realizing losses on bad debts.
Uncollectible Accounts
Uncollectible accounts, also known as bad debts, are accounts receivable that cannot be collected. This happens when a customer isn't able to meet their payment obligations due to financial difficulties or other reasons. For companies like Fonda Bikes Co., estimating uncollectible accounts accurately is vital for financial planning.
Businesses often establish an allowance for doubtful accounts to anticipate potential losses from uncollectible accounts. This is an estimated amount set aside, usually based on past experience, to cover any receivables that may ultimately prove to be uncollectible. Regular review and adjustment of this allowance ensure it reflects the current risk of uncollectibility. This practice also ensures that the value of total accounts receivable more accurately reflects the amount expected to be received.
Aging Schedule
An aging schedule is a breakdown of accounts receivable according to the length of time invoices have been outstanding. This tool is crucial for assessing the credit risk associated with a company's client base. It categorizes receivables according to their age, such as 'not past due', '1-30 days past due', and further brackets as shown in the exercise above.
This schedule helps businesses like Fonda Bikes Co. to quickly identify overdue accounts and assess the likelihood of uncollectibility. By applying different uncollectible percentages to each bracket, the company creates a realistic estimate of the allowance for doubtful accounts. This structured insight aids decision-making, particularly regarding credit policies and collection strategies to minimize future uncollectible accounts.

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Most popular questions from this chapter

List any errors you can find in the following partial balance sheet: \begin{tabular}{lrrr} \multicolumn{3}{c}{ Jennett Company Balance Sheet December 31, 2010 } \\ Current assets: & Assets & & \\ Cash & \(\$ 250,000\) & \\ Notes receivable & 15,000 & 235,000 \\ \(\quad\) Less interest receivable & \(\$ 398,000\) & \\ Accounts receivable & 36,000 & 434,000 \end{tabular}

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For the fiscal years 2007 and 2006, H.J. Heinz reported the following (in thousands): \begin{tabular}{lrr} \cline { 2 - 3 } & May 2, 2007 & Mear Ending \\ \cline { 2 - 4 } Net sales & \(\$ 9,001,630\) & \(\$ 8,643,438\) \\ Accounts receivable & 996,852 & \(1,002,125\) \end{tabular} Assume that the accounts receivable (in thousands) were \(\$ 1,092,394\) at the beginning of \(2006 .\) a. Compute the accounts receivable turnover for 2007 and 2006. Round to one decimal place. b. Compute the days' sales in receivables at the end of 2007 and 2006. Round to one decimal place. c. What conclusions can be drawn from these analyses regarding Heinz's efficiency in collecting receivables?

At the end of the current year, the accounts receivable account has a debit balance of \(\$ 825,000\) and net sales for the year total \(\$ 9,400,000\). Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions: a. The allowance account before adjustment has a credit balance of \(\$ 11,200\). Bad debt expense is estimated at \(1 / 4\) of \(1 \%\) of net sales. b. The allowance account before adjustment has a credit balance of \(\$ 11,200\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 36,000\). c. The allowance account before adjustment has a debit balance of \(\$ 6,000\). Bad debt expense is estimated at \(1 / 2\) of \(1 \%\) of net sales. d. The allowance account before adjustment has a debit balance of \(\$ 6,000\). An aging of the accounts in the customer ledger indicates estimated doubtful accounts of \(\$ 49,500\).

The following selected transactions were taken from the records of Lights of the West Company for the first year of its operations ending December 31, 2010: Jan. 24. Wrote off account of J. Huntley, \(\$ 3,000\). Feb. 17. Received \(\$ 1,500\) as partial payment on the \(\$ 4,000\) account of Karlene Solomon. Wrote off the remaining balance as uncollectible. May 29. Received \(\$ 3,000\) from J. Huntley, which had been written off on January 24 . Reinstated the account and recorded the cash receipt. Nov.30. Wrote off the following accounts as uncollectible (record as one journal entry): \(\begin{array}{lr}\text { Don O'Leary } & \$ 2,000 \\ \text { Kim Snider } & 1,500 \\ \text { Jennifer Kerlin } & 900 \\ \text { Tracy Lane } & 1,250 \\\ \text { Lynn Fuqua } & 450\end{array}\) Dec. 31. Lights of the West Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, \(1 \frac{1}{2} \%\) of credit sales are expected to be uncollectible. Lights of the West Company recorded \(\$ 975,000\) of credit sales during 2010 . a. Journalize the transactions for 2010 under the direct write-off method. b. Journalize the transactions for 2010 under the allowance method. c. How much higher (lower) would Lights of the West Company's net income have been under the direct write-off method than under the allowance method?

Journalize the following transactions in the accounts of Lemon Grove Co., which operates a riverboat casino: Mar. 1. Received a \(\$ 30,000,60\)-day, \(6 \%\) note dated March 1 from Bradshaw Co. on account. 18\. Received a \(\$ 25,000,60\)-day, \(9 \%\) note dated March 18 from Soto Co. on account. Apr. 30. The note dated March 1 from Bradshaw Co. is dishonored, and the customer's account is charged for the note, including interest. May 17. The note dated March 18 from Soto Co. is dishonored, and the customer's account is charged for the note, including interest. July 29. Cash is received for the amount due on the dishonored note dated March 1 plus interest for 90 days at \(8 \%\) on the total amount debited to Bradshaw Co. on April \(30 .\) Aug. 23. Wrote off against the allowance account the amount charged to Soto Co. on May 17 for the dishonored note dated March 18 .
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