ACC 333 Lecture : debt and shareholders.docx

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blacksardine128

22 Apr 2012

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Direct write-off method is one of the two most common accounting techniques of bad debts treatment. In the direct write-off method, uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts. When debt is determined as uncollectible, a journal entry is passed in which bad debts expense account is debited and accounts receivable account is credited as shown below. Direct write-off method does not use any allowance or reserve account. Although the direct write-off method is simple, it has a major drawback. Often it violates the matching principle of accounting because it recognizes bad debt expense which is partly related to previous accounting period. For example if sales are made at the end of accounting year 20x1, bad debts will be realized in the beginning months of accounting year 20x2.

Related Questions

Information related to Hermesch Company for 2012 is summarizedbelow.

Total credit sales $2,200,000
Accounts receivable at December 31 825,000
Bad debts written off 33,000

What amount of bad debts expense will Hermesch Company report if ituses the direct writeoff method of accounting for bad debts?
$ ______

Assume that Hermesch Company estimates its bad debts expense to be2% of credit sales. What amount of bad debts expense will Hermeschrecord if it has an Allowance for Doubtful Accounts credit balanceof $4,000?
$ ______

Assume that Hermesch Company estimates its bad debts expense basedon 6% of accounts receivable. What amount of bad debts expense willHermesch record if it has an Allowance for Doubtful Accounts creditbalance of $3,000?
$ ______

Assume the same facts as in the question above, except that thereis a $3,000 debit balance in Allowance for Doubtful Accounts. Whatamount of bad debts expense will Hermesch record?
$ ______

If the allowance method of accounting for uncollectible receivables method was used and an estimate was made at year end, Dec.31 ........what general ledger accounts are debited and credited in JANUARY when a particular customer's account is identified as uncollectible?

debit Allowance for Bad Debts; credit Accounts Receivable

debit Bad Debts Expense; credit Accounts Receivable

debit Bad Debts Expense; credit Allowance for Bad Debts

debit Bad Debts Expense; credit Allowance for Bad Debts: incorrect.

debit Accounts Receivable; credit Allowance for Bad Debts

bluemuskrat927

At December 31, 2009, Vizarro Company reports the following resultsfor its calendar-year.
Problem 9-3A
Estimating and reporting bad
debts
P1 P2
Cash sales . . . . . . . . . $2,184,700
Credit sales . . . . . . . . 3,720,000
Accounts receivable . . . . . . . . . . . . . . . . . $1,127,500debit
Allowance for doubtful accounts . . . . . . . . 29,030 debit
Check Bad Debts Expense:
(1a) $55,800, (1c) $62,855
In addition, its unadjusted trial balance includes the followingitems.
Required
1. Prepare the adjusting entry for Vizarro Co. to recognize baddebts under each of the following inde-
pendent assumptions.
a. Bad debts are estimated to be 1.5% of credit sales.
b. Bad debts are estimated to be 1% of total sales.
c. An aging analysis estimates that 3% of year-end accountsreceivable are uncollectible.
2. Show how Accounts Receivable and the Allowance for DoubtfulAccounts appear on its December31,
2009, balance sheet given the facts in part 1a.
3. Show how Accounts Receivable and the Allowance for DoubtfulAccounts appear on its December31,
2009, balance sheet given the facts in part 1c.

P1 - Apply the direct write-off and allowance methods to ac-
count for accounts receivable. The direct write-off method
charges Bad Debts Expense when accounts are written off asun-
collectible. This method is acceptable only when the amount ofbad
debts expense is immaterial. Under the allowance method, bad
debts expense is recorded with an adjustment at the end ofeach
accounting period that debits the Bad Debts Expense accountand
credits the Allowance for Doubtful Accounts. Theuncollectible
accounts are later written off with a debit to the Allowancefor
Doubtful Accounts.
P2 - Estimate uncollectibles using methods based on sales and
accounts receivable. Uncollectibles are estimated by focus-
ing on either (1) the income statement relation between baddebts
expense and credit sales or (2) the balance sheet relationbetween
accounts receivable and the allowance for doubtful accounts.The
first approach emphasizes the matching principle using theincome
statement. The second approach emphasizes realizable value of
accounts receivable using the balance sheet.

I

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ACC 333 Lecture : debt and shareholders.docx

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