Using the aging schedule above, which of the following best describes how the Allowance for Doubtful Accounts is determined under the aging of receivables method?

• A. By recording bad debt expense only when an account is actually written off.
• B. By applying a single percentage to the total accounts receivable balance.
• C. By writing off specific accounts that are deemed uncollectible during the period.
• D. By estimating uncollectible accounts based on the age of each receivable and summing the required allowance for all age categories.

Answer: (D)

Verified step by step guidance

1. Understand the concept of the aging of receivables method: This method estimates uncollectible accounts by categorizing accounts receivable based on their age and applying different percentages to each age category. Older receivables are generally considered more likely to be uncollectible.
2. Review the aging schedule: The aging schedule is a breakdown of accounts receivable into different age categories (e.g., 0-30 days, 31-60 days, etc.). Each category is assigned a percentage that reflects the likelihood of uncollectibility.
3. Calculate the estimated uncollectible amount for each age category: Multiply the balance of accounts receivable in each age category by the corresponding percentage of estimated uncollectibility. For example, if the balance in the 31-60 days category is \$10,000 and the estimated uncollectibility percentage is 5%, the uncollectible amount for this category would be \$10,000 × 0.05.
4. Sum the estimated uncollectible amounts: Add up the uncollectible amounts calculated for all age categories to determine the total Allowance for Doubtful Accounts required.
5. Record the adjustment: Use the total Allowance for Doubtful Accounts to adjust the balance in the allowance account and record the corresponding bad debt expense in the financial statements.