Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest

Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 2013:


ABC Beauty
Angel Wigs
Zodiac Beauty
Subtotals
 15,000
8,000
3,000
875,000 18,000
8,000
112,000
15,000
415,000
3,000
210,000 55,000
1–30 31–60 61–90
Not
Due
Past
Customer Balance 91–120
Days Past Due
A B C D E F G H
65,000
The following accounts were unintentionally omitted from the aging schedule:
Customer Due Date Balance
Arcade Beauty Aug. 17, 2013 $10,000
Creative Images Oct. 30, 2013 8,500
Excel Hair Products July 3, 2013 7,500
First Class Hair Care Sept. 8, 2013 6,600
Golden Images Nov. 23, 2013 3,600
Oh That Hair Nov. 29, 2013 1,400
One Stop Hair Designs Dec. 7, 2013 4,000
Visions Hair & Nail Jan. 11, 2014 9,000
Wig Creations has a past history of uncollectible accounts by age category, as follows:
Age Class
Percent
Uncollectible
Not past due 1%
1–30 days past due 4
31–60 days past due 16
61–90 days past due 25
91–120 days past due 40
Over 120 days past due 80


Instructions

1. Determine the number of days past due for each of the preceding accounts.

2. Complete the aging of receivables schedule by adding the omitted accounts to the
bottom of the schedule and updating the totals.

3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.

4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $7,375 before adjustment on December 31, 2013. Journalize the adjustment for uncollectible accounts.

5. Assume that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?


Answer:

1.
Customer Due Date Number of Days Past Due
Arcade Beauty Aug. 17, 2013 136 days (14 + 30 + 31 + 30 + 31)
Creative Images Oct. 30, 2013 62 days (1 + 30 + 31)
Excel Hair Products July 3, 2013 181 days (28 + 31 + 30 + 31 + 30 + 31)
First Class Hair Care Sept. 8, 2013 114 days (22 + 31 + 30 + 31)
Golden Images Nov. 23, 2013 38 days (7 + 31)
Oh That Hair Nov. 29, 2013 32 days (1 + 31)
One Stop Hair Designs Dec. 7, 2013 24 days
Visions Hair & Nail Jan. 11, 2014 Not past due
2. and 3.
Aging of Receivables Schedule
December 31, 2013
Customer Balance
Not
Past
Due
Days Past Due
1–30 31–60 61–90 91–120
Over
120
ABC Beauty 15,000 15,000
Angel Wigs 8,000 8,000
Zodiac Beauty 3,000 3,000
Subtotals 875,000 415,000 210,000 112,000 55,000 18,000 65,000
Arcade Beauty 10,000 10,000
Creative Images 8,500 8,500
Excel Hair Products 7,500 7,500
First Class Hair Care 6,600 6,600
Golden Images 3,600 3,600
Oh That Hair 1,400 1,400
One Stop Hair Designs 4,000 4,000
Visions Hair & Nail 9,000 9,000
Totals 925,600 424,000 214,000 117,000 63,500 24,600 82,500
Percentage uncollectible 1% 4% 16% 25% 40% 80%
Estimate of uncollectible
accounts 123,235 4,240 8,560 18,720 15,875 9,840 66,000




4. Bad Debt Expense 115,860
Allowance for Doubtful Accounts 115,860
Uncollectible accounts estimate
($123,235 – $7,375).



5. On the balance sheet, assets would be overstated by $115,860, since the allowance for doubtful accounts would be understated by $115,860. In addition, the owner’s capital account would be overstated by $115,860, since bad debt expense would be understated and net income overstated by $115,860 on the income statement.