How is the aging method used to estimate uncollectible accounts?

• A. Ignore age and apply a single estimated default rate to all receivables
• B. Classify by age and apply estimated default rates to each group
• C. Use aging for inventory purposes
• D. Use the aging method only for tax purposes

Answer: (B)

The aging method estimates uncollectible accounts by grouping receivables by how long they have been outstanding and applying different estimated default rates to each group, reflecting that the risk of nonpayment increases with time. By sorting balances into age categories (for example, current, 1–30 days past due, 31–60 days, 61–90 days, over 90 days) and assigning a historical default rate to each category, you calculate a separate allowance for each bucket and then sum them to determine the total allowance. This approach produces a more accurate estimate of what will actually be uncollectible and aligns the expense with the period in which the related revenue was earned. For instance, a 0–30 day bucket might be 20,000 at a 2% rate, 31–60 days 8,000 at 5%, 61–90 days 4,000 at 10%, and over 90 days 2,000 at 20%; the total allowance would be 400 + 400 + 400 + 400 = 1,600. Using a single rate for all receivables ignores the increasing risk with age, and aging is not used for inventory or tax purposes.