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Item $2$

P$5-6($Algo$)$ Determining Bad Debt Expense Based on Aging Analysis and Interpreting Ratios LO$5-3,5-4$

IceKreme Inc. makes ice cream machines for sale to ice cream parlours. The following events occurred between April $1$ and June $30$ of the current year:

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April$10$Received an order from Peter$$s Appliances, a wholesaler, for $10$ machines.April$30$Sold $15$ machines to Yuri Inc. on credit.May$1$The purchasing manager of Peter$$s Appliances visited IceKreme$$s factory and purchased $12$ machines on credit, instead of the $10$ machines that were previously ordered.May$5$Yuri Inc. paid for the machines purchased on April $30.$May$7$Sold $2$ machines to Cheng Ltd$.$ on credit.May$10$Wrote off $$14,000$ of accounts receivable that were considered uncollectible. These receivables relate to sales made prior to April $1$ of the current year.May$10$Peter$$s Appliances paid the amount due to IceKreme.June$30$Recovered $$4,000$ from the receivables that were written off on May $10.$

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Additional information is as follows:

IceKreme sold all machines at $$20,000$ per unit.

All of IceKreme$$s sales were on credit with terms n$/30.$

IceKreme$$s records included the following items and their balances as at March $31$ of the current year:

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$$Accounts receivable$$100,000$Allowance of doubtful accounts $($credit balance$)25,000$Net sales$1,100,000$solve it with The$$hand$$requires$$calculating$$the$$amount$$of$$receivables$$that$$may$$not$$be$$collectible$$using$$the$$aging$$of$$accounts$$receivable$$method$.$This$$method$$estimates$$bad$$debt$$expense$$based$$on$$the$$age$$of$$outstanding$$accounts$$receivable$,$with$$the$$assumption$$that$$the$$longer$$a$$debt$$remains$$unpaid$,$the$$less$$likely$$it$$is$$to$$be$$collected$.$The$$company$$categorizes$$its$$accounts$$receivable$$into$$different$$age$$groups$$and$$applies$$a$$specific$$uncollectible$$rate$$for$$each$$group$.$

Explanation:

The$$aging$$analysis$$allows$$IceKreme$$Inc$.$to$$estimate$$future$$uncollectible$$amounts$$based$$on$$historical$$patterns$$of$$collection$.$This$$is$$crucial$$for$$accurate$$financial$$reporting$$and$$for$$creating$$an$$adequate$$allowance$$for$$doubtful$$accounts$.$By$$using$$percentages$$of$$uncollectible$$that$$increase$$with$$the$$age$$of$$receivables$,$the$$company$$adjusts$$its$$financial$$statements$$to$$account$$for$$probable$$losses$.$

$$Presentation$$of$$Relevant$$Formulas:

Aging$$Method$$for$$Estimating$$Bad$$Debt$$Expense:

$$Bad$$Debt$$Expense$=($Accounts$$Receivable$$Estimated$\%$Uncollectible$)$

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Where:

Accounts$$receivable$$are$$divided$$into$$aging$$categories$($Not$$yet$$due$,130$days$$past$$due$,3160$days$$past$$due$,$Over$60$days$$past$$due$).$

$$The$$percentages$$are$$applied$$based$$on$$the$$age$$of$$receivables:$5\%,10\%,15\%,$and$20\%.$

Accounts$$Receivable$$Turnover:

$$Ending$$Accounts$$Receivable$=$Beginning$$Accounts$$Receivable$+$Credit$$Sales$$Collections$$Write$-$offs$+$Recoveries$$

Explanation:

These