Newcomer Company has credit sales of $1.8 million dollars. On December 31, 2008, the companys Allowance for Doubtful Accounts has an unadjusted credit balance of $1,520. Newcomer prepares a schedule of its December 31, 2008, accounts receivable by age. On the basis of past experience, it also estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:
December 31, 2008
Accounts Receivable Age of Accounts Receivable Expected Percent Uncollectible
$26,000 Not yet due 1.5%
18,000 1 to 30 days past due 3.0%
8,000 31 to 60 days past due 6.0%
4,000 61 to 90 days past due 20%
1,500 Over 90 days past due 60%
Required
1. Estimate the amount needed in the Allowance for Doubtful Accounts at December 31, 2008, using the aging of accounts receivable method.
2. Prepare the journal entry to record bad debts expense at December 31, 2008.
Analysis Component
3. On June 30, 2009, Newcomer concludes that a customer's $450 receivable (created in 2008) is uncollectible and that the account should be written off. What effect will this action have on Newcomer's 2009 net income? Explain.