Chapter 8: Q11RQ (page 465)
What are some limitations of using the direct write-off method?
Answer
It is against the matching principle.
Over-estimation of the receivables.
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When is bad debts expense recorded when using the direct write-off method?
Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on the
balance sheet
On August 31, 2018, Bouquet Floral Supply had a \(140,000 debit balance in AccountsReceivable and a \)5,600 credit balance in Allowance for Bad Debts. During September,
Bouquet made:
• Sales on account, \(550,000. Ignore Cost of Goods Sold.
• Collections on account, \)584,000.
• Write-offs of uncollectible receivables, $4,000.
Requirements
1. Journalize all September entries using the allowancemethod. Bad debts expense wasestimated at 2% of credit sales. Show all September activity in Accounts Receivable,Allowance for Bad Debts, and Bad Debts Expense (post to these T-accounts).
2. Using the same facts, assume that Bouquet used the direct write-off method toaccount for uncollectible receivables. Journalize all September entries using thedirect write-offmethod. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.
3. What amount of Bad Debts Expense would Bouquet report on its Septemberincome statement under each of the two methods? Which amount better matchesexpense with revenue? Give your reason.
4. What amount of netaccounts receivable would Bouquet report on its September30, 2018, balance sheet under each of the two methods? Which amount is morerealistic? Give your reason.
Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?
When is bad debts expense recorded when using the allowance method?
Recording credit sales and collections
Steller Corporation had the following transactions in June:
Jun .1 | Sold merchandise inventory on account to Carter Company, \(1,575. |
6 | Sold merchandise inventory for cash, \)550 |
12 | Received cash from Carter Company in full settlement of its accounts receivable |
20 | Sold merchandise inventory on account to Iris Company, \(765 |
22 | Sold merchandise inventory on account to Driver Company, \)230 |
28 | Received cash from Iris Company in partial settlement of its accounts receivable, \(300 |
Requirements
1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.
2. Post the transactions to the general ledger and the accounts receivable subsidiary
ledger. Assume all beginning balances are \)0.
3. Verify the ending balance in the control Accounts Receivable equals the sum of the
balances in the subsidiary ledger.
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