Accounting

DQ2) Why does the direct write-off method of accounting for bad debts usually fail to match revenues and expenses?

ANSWER

The direct-write-off method debits bad debt expense and credits accounts receivable when the firm determines that the account is un-collectable. This approach, while targeting a specific account not being paid, has several drawbacks.

1. while the specific account is identified, the period that the original sale occurred is ignored. Thus, there is a mismatch between the expense of selling on credit and the period that the expense is actually recognized.

2. by not recognizing the potential for accounts to become un-collectable, the amounts reported on the financial statements are overstated in terms of the actual amount the firm will ultimately collect.

QS9-3) Warner Company’s year-end unadjusted trial balance shows accounts receivable of $99,000 allowance for doubtful accounts of $600 (credit), and sales of $280,000. Uncollectibles are estimated to be 1.5% of accounts receivable.

1. Prepare the December 31 year-end adjusting entry for uncollectibles.

2. What amount would have been used in the year-end adjusting entry if the allowance account had a year-end unadjusted debit balance of $300?

1.5% of 99,000 = 1,485 (Balance required)

1485- 600 = 885

1485 + 300 (debit) = 1785

|DESCRIPTION |DEBIT |CREDIT |

|Bad debt |885 | |

|Allowance for bad debt | |885 |

|Being the bad debt expense required to make a provision of 1.5% of sales |

|Bad debt...