LO1

 

Problem  7-2A   Using  an  Aging  Schedule  to  Account  for  Bad  Debts Rough Stuff is a distributor of large rocks. It sells on credit to commercial landscaping companies and extends terms that require customers to pay in 60 days. For accounts that are not overdue,

Rough Stuff has found that there is a 90% probability of collection. For accounts up to one

month past due, the likelihood of collection decreases to 75%. If accounts are between one and two months past due, the probability of collection is 65%, and if an account is over two months past due, Rough Stuff estimates only a 25% chance of collecting the receivable.

On December 31, 2014, the credit balance in Allowance for Doubtful Accounts is $34,590.

The amounts of gross receivables, by age, on this date are as follows:

Category                                                               Amount

 

Current                                                                 $200,000

Past due:

Less than one month                                          60,300

One to two months                                             35,000

Over two months                                                45,000

 

Required

1.        Prepare a schedule to estimate the amount of uncollectible accounts at December 31, 2014.

2.        Rough Stuff knows that $40,000 of the $45,000 amount that is more than two months overdue is due from one customer that is in severe financial trouble. It is rumored that the customer will be filing for bankruptcy in the near future. As controller for Rough Stuff, how would you handle this situation?

3.        Show how accounts receivable would be presented on the December 31, 2014, balance sheet.