Case Study: Brinson

Brinson, Inc. has accounts receivable totaling $2,650,000 on January 1, 2004. This include $2,100,000 from sales in December, 2003; $450,000 from sales in November, 2003; and $100,000 from sales earlier in October, 2003 or earlier. During January Brinson records the following activity:
Sales total $4,700,000; half are for cash, and half are on account.
Brinson collects $2,030,000 from prior sales; this includes $1,640,000 from December sales, $370,000 from November sales, and $20,000 from October and before.
Brinson determines that three sales are uncollectible: a $50,000 sale from June, 2003; a $20,000 sale from November; and a $20,000 sale from December.
Brinson uses the aging of accounts receivable method to estimate bad debt expense. The rates used are:
0 to 30 days: 2%
31 to 60 days: 5%
> 60 days: 25%

Required: Calculate the net accounts receivable for January 1 and January 31, 2004.
Solution: The problem can be solved in four steps. First, make the aging of accounts receivable table for January 1 with the information given; this allows you to calculate the net account receivable. Second, update the table for the transactions that took place during January, and calculate then ending allowance for doubtful accounts for January. Third, calculate the net accounts receivable for the end of January.
1. The information in the top of the problem allow you to make the following aging table:

0 to 30
31 to 60
60 +
Total
Accounts receivable
2,100,000
450,000
100,000
2,650,000
%
2%
5%
25%

Amount
42,000
22,500
25,000
89,500

The total accounts receivable is 2,650,000 and the total allowance is 89,500, so the net for January 1 is: Accounts receivable (gross) 2,650,000 Less: allowance for doubtful accounts (89,500) Accounts receivable (net) 2,560,500

2. Before updating the table with transactions, remember that a month has passed: therefore, all the values from the table above will shift one cell to the right (except for the 100,000 in 60+, which has nowhere to shift). In other words, the 0 to 30 cell starts out empty, 31 to 60 is 2,100,000 and 60 + is 550,000 (450,000 from the prior 31 to 60, plus 100,000 from the prior 60+).

New credit sales are 4,700,000 / 2 = 2,350,000. Since there are no collections or write-offs for January sales, this amount makes up the ending 0 to 30 value.

The 31 to 60 cell starts with the 2,100,000 (as noted above). Collections total 1,640,000 so this amount is subtracted. The December write-off of 20,000 also

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