Chapter 7: Q2DQ (page 342)
Why does the direct write-off method of accounting for bad debts usually fail to match revenues and expenses?
The direct write-off method of accountingis used by firms whenthe percentage of their total credit salesis more, and there is arisk of non-payment from the debtors.
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Record the sale by Balus Company of $125,000 in accounts receivable on May 1. Balus is charged a 2.5% factoring fee.
The following selected transactions are from Springer Company.
2016
Nov. 1 Accepted a \(4,800, 90-day, 8% note dated this day in granting Steve Julian a time extension on his past-due account receivable.
Dec. 31 Made an adjusting entry to record the accrued interest on the Julian note.
2017
Jan. 30 Received Julian’s payment for principal and interest on the note dated November 1.
Feb. 28 Accepted a \)12,600, 30-day, 8% note dated this day in granting a time extension on the pastdue account receivable from King Co.
Mar. 1 Accepted a \(6,200, 60-day, 12% note dated this day in granting Myron Shelley a time extension on his past-due account receivable.
30 The King Co. dishonored its note when presented for payment.
Apr. 30 Received payment of principal plus interest from M. Shelley for the March 1 note.
June 15 Accepted a \)2,000, 72-day, 8% note dated this day in granting a time extension on the past-due account receivable of Ryder Solon.
21 Accepted a $9,500, 90-day, 8% note dated this day in granting J. Felton a time extension on his past-due account receivable.
Aug. 26 Received payment of principal plus interest from R. Solon for the note of June 15.
Sep. 19 Received payment of principal plus interest from J. Felton for the June 21 note.
Nov. 30 Wrote off King’s account against Allowance for Doubtful Accounts. Required.
Analysis Component
The following list describes aspects of either the allowance method or the direct write-off method to account for bad debts. For each item listed, indicate if the statement best describes either the allowance (A) method or the direct write-off (DW) method.
2. Accounts receivable on the balance sheet is reported at net realizable value.
Hovak Company has credit sales of \(4,500,000 for year 2017. At December 31, 2017, the company’s Allowance for Doubtful Accounts has an unadjusted debit balance of \)3,400. Hovak prepares a schedule of its December 31, 2017, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here.
Required 1. Compute the required balance of the Allowance for Doubtful Accounts at December 31, 2017, using the aging of accounts receivable method
Refer to the information in Exercise 7-7 to complete the following requirements.
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