Estimation of Doubtful Accounts

Methods
Financial Position Approach/Balance Sheet Approach
o Aging of Accounts Receivable
o Percentage of Accounts Receivable

Income Statement Approach

o Percentage of Sales
 Aging of AR
-Involves analysis where accounts are classifies into ‘not due’ or ‘past due’
Required Allowance(Ending balance) = Total of each classification x Rate of Loss
Example:
The following data are summarized in aging the accounts receivable at the end of the period:
Balance Experience Rate If the doubtful account has 10,000 credit balance before
Not due 500,000.00 1% 5,000.00 adjustment, the doubtful account is computed as follows:
1-30 days past due 300,000.00 2% 6,000.00
Allowance for Doubtful Accounts
31-60 days past due 200,000.00 4% 8,000.00
Write Off - 10,000.00 BEG
61-90 days past due 100,000.00 7% 7,000.00
END 50,000.00 40,000.00 Expense
91-180 days past due 50,000.00 10% 5,000.00
SUM 50,000.00 50,000.00 SUM
181-365 days past due 30,000.00 30% 9,000.00
More than 1 year 20,000.00 50% 10,000.00
1,200,000.00 50,000.00
Journal Entry
Doubtful Accounts 40,000
Allowance for DA 40,000
Percentage of Accounts Receivable
Required Allowance = Total Open Accounts x Rate
Example:
The balance of accounts receivable is P2,000,000 and the credit balance in the allowance for
doubtful accounts is P10,000. Doubtful accounts are estimated at 3% of Accounts receivable.
Allowance for Doubtful Accounts
Write Off - 10,000.00 BEG
END 60,000.00 50,000.00 Expense
SUM 60,000.00 60,000.00 SUM

Journal Entry
Doubtful Accounts 50,000
Allowance for DA 50,000
 Percentage of Sales
Doubtful account expense = Total Sales x Rate
Example: The following are gathered from the ledger:
Accounts Receivable 1,000,000.00
Sales 5,050,000.00
Sales Return 50,000.00
Allowance for Doubtful accounts 20,000.00
Doubtful accounts are estimated at 1% of net sales.

Doubtful account expense = 5,000,000 x 1% = 50,000

Journal Entry
Doubtful Accounts 50,000
Allowance for DA 50,000

Adjusted balance of Allowance for Doubtful accounts

Allowance for Doubtful Accounts
Write Off - 20,000.00 BEG
END 70,000.00 50,000.00 Expense
SUM 70,000.00 70,000.00 SUM
 Correction in Allowance for Doubtful
Accounts
Excessive Allowance
Allowance for Doubtful Accounts xxx
Doubtful Accounts xxx

Inadequate Allowance
Doubtful Accounts xxx
Allowance for Doubtful Accounts xxx

Miscellaneous income – account used to absorb excessive allowance adjustment over the debit balance of Doubtful Accounts.

Allowance for Doubtful Accounts 30,000

Doubtful accounts 20,000
Misc. Income 10,000
 Debit Balance in Allowance account
Allowance accounts has normal balance of credit.
Debit balances are due to accounts written off during the year.
Example: On January 1, allowance account before adjustment has a credit balance of 30,000 and during the year
accounts written off amounts to 50,000. Allowance for Doubtful accounts (30,000.00)
JE: Allowance for DA 50,000 Less: Accounts Written Off 50,000.00
Accounts receivable 50000 Allowance after write off 20,000.00

If the December 31 required allowance amounts to 40,000 the adjustment should be:

Doubtful Accounts 60,000 Allowance for Doubtful Accounts

Allowance for Doubtful accounts 60,000 Write Off 50,000.00 30,000.00 BEG
END 40,000.00 60,000.00 Expense
SUM 90,000.00 90,000.00 SUM
 Impairment of Accounts Receivables
Guidelines:
a. Individually significant accounts receivable should be considered for impairment separately and is impaired,
impairment loss is recognized.
b. Accounts receivable not individually significant should be collectively assessed for impairment.
c. Accounts receivable not considered as impaired should be included with other accounts receivable with similar
credit-risk characteristics and collectively assessed for impairment.

Sample: An entity had the following accounts receivable at the end of the year. All of the accounts are individually
significant except the other customer accounts. Reliable impairment loss rate for other accounts is 5%
Customer A 1,000,000.00 not impaired -
Customer B 1,500,000.00 not impaired -
Customer C 2,500,000.00 partly impaired 1,500,000.00
Customer D 3,000,000.00 partly impaired 1,000,000.00
Customer E 2,000,000.00 totally impaired 2,000,000.00
Other customer's accounts 4,000,000.00
Computation: Total 14,000,000.00

Impairment Loss Customer A 1,000,000.00

Customer C 1,500,000.00 Customer B 1,500,000.00
Customer D 1,000,000.00 Other customer's accounts 4,000,000.00
Customer E 2,000,000.00 6,500,000.00
Other AR (6,500,000 *5%) 325,000.00
4,825,000.00
 Problem 1
Marvelous Company reported the following information before adjustment at year end.
Accounts Receivable 500,000.00
Notes Receivable 200,000.00
Allowance for doubtful accounts 20,000.00
sales 5,000,000.00
Sales return and allowance 30,000.00
Sales discount 20,000.00

Determine the amount of Allowance for Doubtful Accounts and Doubtful Account Expense under the following
independent scenarios:

1. Past experience indicates that 75% of all sales are credit sales and that an average 2% of credit sales may prove
uncollectible
2. One percent of gross sales may prove uncollectible
3. An analysis of the aging of trade receivables indicate that accounts receivable in the amount of 80,000 may prove
uncollectible,
4. The policy is to maintain an allowance for doubtful accounts equal to 10% of the outstanding accounts Receivable.
 Problem 2
At year end, ABC Company reported accounts receivable of 6,000,000 and allowance for doubtful accounts of 300,000
before year end adjustment:
Accounts Receivable Probability of collection
Not due 3,000,000.00 96%
1-30 days past due 2,000,000.00 90%
31-60 days past due 400,000.00 80%
61-90 days past due 300,000.00 70%
91-180 days past due 200,000.00 65%
181-365 days past due 100,000.00 0%
6,000,000.00

The accounts outstanding for over 181 days have zero probability of collection and must be written off immediately.
What is the appropriate balance of Allowance for Doubtful Account?
What is the correct Doubtful Account expense?