The following data are from the company's records for the year ended December 31:

-Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts be after the bad debts adjustment?

Question

The following data are from the company's records for the year ended December 31:
 
-Refer to A-One Construction. If the aging approach is used to estimate bad debts, what should the balance in the Allowance for Doubtful Accounts be after the bad debts adjustment?

Quizplus · Accepted Answer

To estimate bad debts using the aging approach, we first calculate the total of all outstanding accounts receivable balances in each aging category (i.e. current, 1-30 days past due, 31-60 days past due, etc.) and then apply a percentage to each category based on historical experience. We then add up the estimated bad debts for each category to arrive at the total estimated bad debts.

Using the data provided, we can calculate the estimated bad debts as follows:

Current: $2,000,000 x 1% = $20,000 
1-30 days past due: $300,000 x 3% = $9,000 
31-60 days past due: $125,000 x 6% = $7,500 
Over 60 days past due: $50,000 x 10% = $5,000 
Total estimated bad debts: $41,500

To adjust the Allowance for Doubtful Accounts balance, we need to subtract the current balance of $12,300 and add the estimated bad debts of $41,500, resulting in a new Allowance for Doubtful Accounts balance of $29,200 (C).

The Following Data Are from the Company's Records for the Year