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Cowen’s a large department store located in a metropolitan area has been experiencing difficulty in estimating its bad debts

Cowen’s, a large department store located in a metropolitan area, has been experiencing difficulty in estimating its bad debts. The company has decided to prepare an aging schedule for its outstanding accounts receivable and estimate bad debts by the due dates of its receivables. This analysis discloses the following information:

BalanceAge of ReceivableEstimated Percentage Uncollectible
$194,000Under 30 days0.8%
119,00030-60 days2.0%
73,00061-120 days5.0%
41,000121-240 days20.0%
25,000241-360 days35.0%
19,000Over 360 days60.0%
$471,000
Required:
1.Use the preceding analysis to compute the estimated amount of uncollectible receivables.
2.What is the net realizable value of Cowen’s accounts receivable?
3.Prepare the Dec. 31 journal entry to record Cowen’s estimated uncollectible, assuming the balance in Allowance for Doubtful Accounts prior to adjustment is:
A. 0
B. $3,100 (debit)
C. $2,500 (credit)

Answer and Explanation

Under 30 days194,000x01,552
30-60 days119,000x02,380
61-120 days73,000x03,650
121-240 days41,000x08,200
241-360 days25,000x08,750
Over 360 days19,000x111,400
Total471,00035,932

1. Use the Aging analysis to compute the estimated amount of uncollectible receivables.

The estimated amount uncollectible based on the data provided is $35,932

2. What is the net realizable value of Cowen’s accounts receivable?

Net realizable value of accounts receivable $435,068

3a. Prepare the journal entry on Dec. 31 to record Cowen’s estimated uncollectible, assuming the balance in Allowance for Doubtful Accounts prior to adjustment is $0.

Bad Debt Expense             35,932
Allowance for doubtful debts             35,932

3b. Prepare the journal entry on Dec. 31 to record Cowen’s estimated uncollectibles, assuming the balance in Allowance for Doubtful Accounts prior to adjustment is a $3,100 debit.

Bad Debt Expense             39,032
Allowance for doubtful debts             39,032

Calculation = $35,932 + 3,100 = $39,032

3c. Prepare the journal entry on Dec. 31 to record Cowen’s estimated uncollectibles, assuming the balance in Allowance for Doubtful Accounts prior to adjustment is a $2,500 credit.

Bad Debt Expense             33,432
Allowance for doubtful debts             33,432

Calculation = $35,932 – 2,500 = $33,432

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