Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 112

Bad debts analysis—Allowance account and financial statement effects

The following is a portion of the current asset section of the balance sheets of HiROE Co., at December 31, 2011 and 2010:

	December 31, 2011	December 31, 2010
Accounts receivable, less allowance for
uncollectible accounts of $54,000 and
$18,000, respectively	906,000	722,000

Required:

a. Describe how the allowance amount at December 31, 2011, was most likely determined.

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b. If bad debts expense for 2011 totaled $48,000, what was the amount of accounts receivable written off during the year? (Hint: Use the T-account model of the Allowance account, plug in the three amounts that you know, and solve for the unknown.)

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c. The December 31, 2011, Allowance account balance includes $21,000 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write-off on

1. Working capital at December 31, 2011?

2. Net income and ROI for the year ended December 31, 2011?

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d. What do you suppose was the level of HiROE’s sales in 2011, compared to 2010? Explain your answer.

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e. Calculate the ratio of the Allowance for Uncollectible Accounts balance to the Accounts Receivable balance at December 31, 2010, and 2011. What factors might have caused the change in this ratio?

Step 1 of 6

Bad debts analysis – Effect on Financial statement and Allowance account

a) The most accurate method of determining the correct allowance account balance is to do an analysis of aged trial balance for accounts receivable. The aged trial balance for accounts receivable shows the outstanding amount with age. Usually the amounts are shown on 30/60/90 etc age or days outstanding.