BAD DEBT
Chatter Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Chatter's Accounts Receivable account was $389,000 and the Allowance for Doubtful Accounts had a debit balance of $5,000. The year-end balance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the aging schedule shown below:
|
Days Account Outstanding
|
Amount
|
Probability of Collection
|
|
Less than 16 days
|
$293,000
|
.97
|
|
Between 16 and 30 days
|
$102,000
|
.89
|
|
Between 31 and 45 days
|
$ 70,000
|
.83
|
|
Between 46 and 60 days
|
$ 55,000
|
.76
|
|
Between 61 and 75 days
|
$ 28,000
|
.60
|
|
Over 75 days
|
$ 8,000
|
.30
|
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?