P7-3 (Bad-Debt Reporting—Aging)
Manilow Corporation operates in an industry that has a high rateof bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable accountwas $555,000 and the Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end bal-ance reported in the balance sheet for the Allowance for Doubtful Accounts will be based on the agingschedule shown below.
Probability ofDays Account Outstanding Amount CollectionLess than 16 days $300,000 .98Between 16 and 30 days 100,000 .90Between 31 and 45 days 80,000 .85Between 46 and 60 days 40,000 .80Between 61 and 75 days 20,000 .55Over 75 days 15,000 .00
What is the appropriate balance for the Allowance for Doubtful Accounts at year-end?
Show how accounts receivable would be presented on the balance sheet.
What is the dollar effect of the year-end bad debt adjustment on the before-tax income?