Problem
Marin Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Marin's Accounts Receivable account was $590,400 and Allowance for Doubtful Accounts had a credit balance of $40,320. 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
|
$312,000
|
0.96
|
|
Between 16 and 30 days
|
116,300
|
0.90
|
|
Between 31 and 45 days
|
84,500
|
0.86
|
|
Between 46 and 60 days
|
40,600
|
0.80
|
|
Between 61 and 75 days
|
21,600
|
0.55
|
|
Over 75 days
|
15,400
|
0.00
|
Assume that accounts with a zero percent chance of collection are intended to be written off.
1. What is the appropriate balance for the Allowance for Doubtful Accounts at year-end?
2. Show how accounts receivable would be presented on the balance sheet.
3. What is the dollar effect of the year-end bad debt adjustment on the before-tax income?