17RQ - Horngren'S Financial And Managerial Accounting

Question

How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?

Step-by-Step Solution

Answer

Under both methods, the business entity firstly determines the targeted balance and then adjusts the debit/credit balance of the allowance account to calculate bad debt. 

Step 1: Definition of Bad Debt Expenses

A business entity’s expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables. 

Step 2: Percent of Receivables method

Firstly, we will determine the targeted balance of the allowance account:

 $\mathrm{Targeted} \mathrm{balance}=\mathrm{Ending} \mathrm{accounts} \mathrm{receivables}\times \mathrm{Estimated} \mathrm{percentages}$

Now in the second step, we will calculate bad debt expenses:

Particular	Amount $
Targeted balance	xx
Add: unadjusted debit balance of allowance for bad debts	xx
Or
Less: unadjusted credit balance of allowance for bad debts	(xx)
Bad debt expenses

Step 3: Aging-of-receivables method

Under the aging-of-receivables method, the business entity firstly determines the targeted balance by using the age of each account receivable. 

In second step we will determine the bad debt expenses as follows:

Particular	Amount $
Targeted balance	xx
Add: unadjusted debit balance of allowance for bad debts	xx
Or
Less: unadjusted credit balance of allowance for bad debts	(xx)
Bad debt expenses