SHORT CASE ANALYSIS ON

ESTIMATION OF DOUBTFUL ACCOUNTS

ACCTG 14
CN 2004

SUBMITTED BY: DONNA MAE A. SINGSON

ACCOUNTING CASE: ESTIMATION OF DOUBTFUL ACCOUNTS
Allowance for doubtful accounts
For several years, Xtreme Co.'s sales have been on a "cash only" basis. On January 1,
20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the
adjusting entry to record the estimated uncollectible receivables at the end of each year
has been ½ of 1% of credit sales, which is the rate reported as the average for the
industry. Credit sales and the year-end credit balances in Allowance for Doubtful
Accounts for the past four years are as follows:
Year Credit Sales Allowance for doubtful
accounts
20Y4 4,000,000 5,000
20Y5 4,400,000 8,250
20Y6 4,800,000 10,200
20Y7 5,100,000 14,400

Laurie Jones, president of Xtreme Co., is concerned that the method used to account
for and write off uncollectible receivables is unsatisfactory. She has asked for your
advice
in the analysis of past operations in this area and for recommendations for change.
1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and
(b) the accounts written off for each of the four years. Support your answer.

A) Addition to Allowance for Doubtful Accounts

= 20Y4 Credit Sales x % of Estimated Uncollectible Receivables
= 4,000,000 x (1/2 x 1%)
= 4,000,000 x 0.5%
= 20,000
To solve the 20Y4 addition to the allowance for doubtful accounts: multiply the
credit sales by the percentage of estimated uncollectible receivables.
= 20Y5 Credit Sales x % of Estimated Uncollectible Receivables
= 4,400,000 x (1/2 x 1%)
= 4,400,000 x 0.5%
= 22,000
To solve for the 20Y5 addition to the allowance for doubtful accounts: multiply the
credit sales by the percentage of estimated uncollectible receivables.

= 20Y6 Credit Sales x % of Estimated Uncollectible Receivables

= 4,800,000 x (1/2x 1%)
= 4,800,000 x 0.5%
= 24,000
To solve for the 20Y6 addition to the allowance for doubtful accounts: Multiply the
credit sales by the percentage of estimated uncollectible receivables.

= 20Y7 Credit Sales x % of Estimated Uncollectible Receivables

= 5,100,000 x (1/2 x 1%)
= 5,100,000 x 0.5%
= 25,500
To solve for the 20Y7 addition to the allowance for doubtful accounts: multiply the
credit sales by the percentage of estimated uncollectible receivables.

The addition to Allowance for Doubtful Accounts for each year

20Y4 - 20,000
20Y5 - 22,000
20Y6 - 24,000
20Y7 - 25,500
B) The accounts written off for each of the four years.
20Y4 Accounts Written Off
= 20Y4 Beginning Balance of Allowance for Doubtful Accounts + Addition to Allowance
for Doubtful Accounts - 20Y4 Ending Balance of Allowance for Doubtful Accounts
= 0 + 20,000 - 5,000
= 15,000
To solve for the accounts written off for the year 20Y4: add the beginning balance of
doubtful accounts and the calculated addition to allowance for doubtful accounts from
part 1, then subtract the ending balance of allowance for doubtful accounts.

2. A) Advise Laurie Jones as to whether the estimate of 1/2 of 1% of credit sales

appears reasonable.
Laurie should estimate the number of bad loans on the basis of the loan percentage
sales tend to result in an excessive or greater quantity of predicted bad with debts. This
ultra-conservative outcome of the current methodology might not be relevant, as it does
not reflect or at least closely estimate the actual value of the receivable accounts which
have been written off.
As shown in the previous calculation, the amount of additional doubtful accounts based
on the percentage of credit sales is higher than the actual accounts receivable. And it
was resulted to the current method of estimating the amount of bad debts on the basis
of the percentage sales of credit sales shows to be inadequate. However, the current
method appears to be resulted in an excessive estimate of bad debts. In addition, the
estimated bad debt should at least approximate the actual amount written off.
Compared to the increase total sales, the allowance for doubtful accounts also
increases but sharply. It should be at least in close proportion to the increase in sales.
B.) Assume that after discussing (a) with Laurie Jones, she asked you what
action might be taken to determine what the balance of Allowance for
Doubtful Accounts should be at December 31, 20Y7, and what possible
changes, if any, you might recommend in accounting for uncollectible
receivables. How would you respond?
Past information may provide some information and sources that may help and allow
the company to estimate the amount of the doubtful accounts with reasonable accuracy.
However, it is normally use different methods to estimate the potential bad debts or the
allowance for uncollectible accounts, no matter how it is accurate or how the method
selected because there is no absolute assurance to the accuracy of the results that can
be obtained from using the one method than other.
There are steps that can be taken to properly know the reasonable accuracy. The
allowance for doubtful accounts as of December 31 2017, an analysis of the actual
historical write-offs of receivables that may provide reasonable indications of the
reasonable balance of the allowance in doubtful accounts. The estimated percentage of
uncollectible accounts based on the aging of receivables may can also give a more
accurate of accounts receivable. However, it is based on the actual write-off results, the
estimated bad debts expense is can be possible to have changes in the estimation of
bad debts that may recommend.