Wiggins Corporation Uses An Accounting Software Packa 479220
Wiggins Corporation Utilizes An Accounting Software Package That Is Ca
Wiggins Corporation utilizes an accounting software package that is capable of producing a detailed aging of outstanding accounts receivable. The aging schedule as of December 31, 20X2, categorizes accounts based on the number of days outstanding, with corresponding amounts. Following is the aging schedule:
| Age Group | Amount Outstanding |
|------------------|---------------------|
| 0 to 30 days | $1,200 |
| 31 to 60 days | $700 |
| 61 to 120 days | $200 |
| Over 120 days | $25 |
Casper Wiggins has extensive experience in assessing the probability of collection based on aging analysis. The collection probabilities are as follows:
| Age Group | Probability of Collection |
|------------------|---------------------------|
| 0 to 30 days | 98% |
| 31 to 60 days | 90% |
| 61 to 120 days | 75% |
| Over 120 days | 50% |
Using this information, prepare:
(a) An aging analysis showing how accounts receivable and the allowance for uncollectible accounts should appear on the balance sheet as of December 31, 20X2.
(b) The journal entry needed to update the allowance for uncollectibles assuming the prior balance was a $15,000 credit.
(c) The journal entry to update the allowance assuming the prior balance was a $5,000 debit.
Furthermore, consider how the allowance account could have a debit balance.
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Paper For Above instruction
Introduction
Accounts receivable management is a crucial aspect of financial reporting, directly influencing a company's liquidity and profitability analysis. The aging of receivables provides insights into the likelihood of collection, enabling the estimation of uncollectible accounts through the allowance method. This paper discusses the preparation of an aging analysis for Wiggins Corporation, including journal entries to adjust the allowance for uncollectibles based on prior balances.
Aging Analysis and Presentation on the Balance Sheet
The first step involves calculating the estimated uncollectible amounts for each aging category by applying the respective probabilities of collection. The outstanding amounts are multiplied by their collection probabilities to determine the expected collectible amount, and the difference between the gross receivables and expected collections constitutes the estimated uncollectibles.
Calculations:
- 0-30 days: $1,200 × (1 - 0.98) = $1,200 × 0.02 = $24
- 31-60 days: $700 × (1 - 0.90) = $700 × 0.10 = $70
- 61-120 days: $200 × (1 - 0.75) = $200 × 0.25 = $50
- Over 120 days: $25 × (1 - 0.50) = $25 × 0.50 = $12.50
Total estimated uncollectible allowance:
$24 + $70 + $50 + $12.50 = $156.50
The accounts receivable account on the balance sheet would be reported at total gross, $2,125, as follows:
| Accounts Receivable | $2,125 |
|---------------------|--------|
Less: Allowance for Uncollectibles | $156.50 (approximate) |
Net realizable value: $2,125 - $156.50 ≈ $1,968.50
This method ensures that the accounts receivable presentation accurately reflects anticipated realizable cash collections.
Journal Entry with Prior $15,000 Credit Balance
The prior balance of $15,000 indicates a credit balance in the allowance account, possibly due to overestimating uncollectibles in previous periods. To adjust the allowance to the new estimated amount, the journal entry is:
```
Allowance for Uncollectibles $ (15,000 - 156.50) = $14,843.50
Bad Debt Expense $14,843.50
```
This reduces the allowance account from the prior balance to the current estimate, recording an expense to recognize current uncollectible risks.
Journal Entry with Prior $5,000 Debit Balance
A debit balance (negative allowance) suggests that previous write-offs exceeded estimates, or errors occurred. To update the allowance:
```
Allowance for Uncollectibles $ (156.50 + 5,000) = $5,156.50
Bad Debt Expense $5,156.50
```
This journal entry increases the allowance to match the current estimate of uncollectibles, properly adjusting the reserve.
How the Allowance Account Might Have a Debit Balance
A debit balance could occur due to several reasons:
- Overly conservative estimates in prior periods leading to excessive expensing.
- Unexpected large write-offs exceeding the established allowance.
- Errors in recording write-offs or adjusting entries.
- Lack of regular review, resulting in an allowance that does not reflect current receivables.
In essence, a debit balance signals the company underestimated uncollectible receivables historically, and corrective entries are necessary to align the allowance with current expectations.
Conclusion
The aging method provides a systematic approach to estimating uncollectible accounts, ensuring financial statements reflect realistic values. Proper adjustments to the allowance account—whether prior balances are credit or debit—are pivotal in maintaining financial statement accuracy. Regular review and precise estimation help mitigate the risks associated with accounts receivable management, ultimately supporting sound financial decision-making.
References
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