Exercise 7-4 Using an Aging Schedule to Account for Bad Debts
Carter Company sells on credit with terms of n/30. For the $500,000 of accounts at the end of the year that are not overdue, there is a 90% probability of collection. For the $200,000 of accounts that are less than a month past due, Carter estimates the likelihood of collection going down to 70%. The probability of collecting the $100,000 of accounts more than a month past due is estimated to be 25%.
Required
1. Prepare an aging schedule to estimate the amount of uncollectible accounts.
2. On the basis of the schedule in part (1), prepare the journal entry at the end of the year to estimate bad debts. Assume that the credit balance in Allowance for Doubtful Accounts is $20,000.