METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

1. Aging of Accounts Receivable (statement of financial position approach)

2. Percent of Accounts Receivable (statement of financial position approach)
3. Percent of Sales (income statement approach)

1. Aging of Accounts Receivable – the amount computed represents the

required ending allowance for doubtful accounts.
Allowance = total of each classification x rate or percent of loss for each
category

EXAMPLE:

The following information was taken from the records of KAYA KO ITO Co. as
of November 30, 2019:

Age Amount % Collectible

Not due P7,523,000 100%

1-30 days past due 2,451,000 99%

31-60 days past due 508,000 98%

61-90 days past due 340,000 96%

Over 90 days 215,000 90%

KAYA KO ITO Co. had an unadjusted credit balance of P80,000 in its allowance
for doubtful accounts as of that date. How much is the adjusted allowance for
doubtful accounts as of November 30, 2019?

Amount %uncollectible

P7,523,000

2,451,000 x 1% = P 24,510

508,000 x 2% = 10,160

340,000 x 4% = 13,600

215,000 x 10% = 21,500

Answer: P69,770
2. Percent of Accounts Receivable – the amount computed represents the
required ending allowance for doubtful accounts.

EXAMPLE:

Laban Co. estimated that 95% of year-end accounts receivable will be

collectible. The total credit sales for the year 2019 were P8,350,000. Accounts
receivable as of January 1, 2019 amounted to P540,700. Total collection for
2019 related to the receivable was P5,388,000. What amount should Laban Co.,
report as net realizable value of accounts receivable at December 31, 2019?

Accounts Receivable, Jan 1 P540,700

Credit sales 8,350,000
Collection (5,388,000)
Accounts Receivable, Dec. 31 3,502,700
% Uncollectible x 5%
Allowance for doubtful accounts (175,135)
Net realizable value 3,327,565

3. Percent of Sales – the amount computed already represents the uncollectible

accounts expense.
EXAMPLE:

At the beginning of current year, Jamin Company had a credit balance 260.000
in the allowance for uncollectible accounts. Based on past experience, 2%of
credit sales would be uncollectible.

During the current year, the entity wrote offP325,000 of uncollectible

counts. Credit sales for the year totaled P9,000,000.

What amount should be reported as uncollectible accounts expense

for the year? What amount should be reported as allowance for uncollectible
accounts at year-end?

Uncollectible accounts expense (2% x 9,000,000) 180,000

Allowance for uncollectible accounts - January 1 260,000
Accounts written off (325,000)
Allowance for uncollectible accounts - December 31 115,000
OTHER EXAMPLES:

1. After reviewing the aging schedule of its accounts receivable at December

31, 2019, Perseverance Company found out that the net realizable value at
that date was P150,250. Additional information was as follows:

Accounts receivable at December 31, 2019 P192,500

Allowance for doubtful accounts at January 1, 2019-credit balance

28,000

Accounts written-off as uncollectible at August 1, 2019 21,000

Recovery in 2019 for accounts written-off in 2018 8,000

How much is the doubtful accounts expense of Perseverance Company for

the year ended December 31, 2019?

Answer:

Allowance for doubtful accounts, 1/1/19 28,000

Accounts Written-off (21,000)

Recovery 8,000

Allowance for doubtful accounts, 12/31/19 15,000

Accounts receivable, 12/31/19 P192,500

Net realizable value (150,250)

Allowance for doubtful accounts - adjusted 42,250

Allowance for doubtful accounts - unadjusted (15,000)

Doubtful accounts expense, end P27,250

2. Effective with the current year, Hall Company adopted a new accounting od
for estimating the allowance for doubtful accounts at the amount indicated
by the year-end aging of accounts receivable.

Allowance for doubtful accounts, January 1 250,000

Provision for doubtful accounts during the current

year at 2% of credit sales of P10,000,000 200,000

Accounts written off 205,000

Estimated uncollectible accounts per aging on December 31 220,000

What amount should be reported as doubtful accounts expense for current

year? Overstatement of doubtful accounts expense?

Allowance for doubtful accounts – January 1 250,000

Doubtful accounts expense (SQUEEZE) 175,000

Total 425,000

Accounts written off (205,000)

Allowance for doubtful accounts – December 31 220,000

Correct doubtful accounts expense 175,000

Recorded doubtful accounts expense 200,000

Overstatement of doubtful accounts expense (25,000)

Adjusting journal entry

Allowance for doubtful accounts 25,000

Doubtful accounts expense 25,000