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, 20Y1:

1 2 3 4 5 301 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 91–120 Customer Balance Days Past Due B C D E F G HA 65,000 Over 120 The following accounts were unintentionally omitted from the aging schedule: Customer Due Date Balance Arcade Beauty Aug. 17, 20Y1 $10,000 Creative Images Oct. 30, 20Y1 8,500 Excel Hair Products July  3, 20Y1 7,500 First Class Hair Care Sept. 8, 20Y1 6,600 Golden Images Nov. 23, 20Y1 3,600 Oh That Hair Nov. 29, 20Y1 1,400 One Stop Hair Designs Dec. 7, 20Y1 4,000 Visions Hair & Nail Jan. 11, 20Y2 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, 20Y1. Journalize the adjustment for uncollectible accounts.

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

Answer:

1.

Customer

Arcade Beauty

Creative Images

Excel Hair Products

First Class Hair Care

Golden Images38 days (7 + 31)

Oh That Hair32 days (1 + 31)

One Stop Hair Designs 24 days

Visions Hair & Nail

2. and 3.

Not

PastOver

Customer Balance Due 1–30 31–60 61–90 91–120 120

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 10,00010,000

Creative Images 8,5008,500

Excel Hair Products 7,5007,500

First Class Hair Care 6,6006,600

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 Accounts115,860

Uncollectible accounts estimate

($123,235 – $7,375).

5. On the balance sheet, assets would be overstated by $115,860 because the 

allowance for doubtful accounts would be understated by $115,860. In addition, 

the owner’s capital account would be overstated by $115,860 because bad debt 

expense would be understated and net income overstated by $115,860 on the 

income statement.