Problem
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow's Accounts Receivable account was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.
Probability of Days Account Outstanding Amount Collection
Less than 16 days $300,000 .98
Between 16 and 30 days 100,000 .90
Between 31 and 45 days 80,000 .85
Between 46 and 60 days 40,000 .80
Between 61 and 75 days 20,000 .55
Over 75 days 15,000 .00
Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
(b) Show how accounts receivable would be presented on the balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?