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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What type of account must the sum of all subsidiary accounts be equal to?
During August 2018, Lima Company recorded the following:
• Sales of \(133,300 (\)122,000 on account; \(11,300 for cash). Ignore Cost of Goods Sold.
• Collections on account, \)106,400.
• Write-offs of uncollectible receivables, \(990.
• Recovery of receivable previously written off, \)800.
Requirement:
1. Journalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.
2. Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method
Delta Watches completed the following selected transactions during 2018
and 2019:2018
Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of
\(450,000 and recorded that amount as expense. The company uses the
allowance method.
31 Made the closing entry for bad debts expense.
2019
Jan. 17 Sold merchandise inventory to Mack Smith, \)400, on account. Ignore Cost of
Goods Sold.
Jun. 29 Wrote off Mack Smith’s account as uncollectible after repeated efforts to
collect from him.
Aug. 6 Received \(400 from Mack Smith, along with a letter apologizing for being so
late. Reinstated Smith’s account in full and recorded the cash receipt.
Dec. 31 Made a compound entry to write off the following accounts as uncollectible:
Cam Carter, \)1,400; Mike Venture, \(1,200; and Russell Reeves, \)400.
31 Estimated that bad debts expense for the year was 2% on credit sales of
\(510,000 and recorded the expense.
31 Made the closing entry for bad debts expense.
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming
the accounts begin with a zero balance. Record the transactions in the general journal
(omit explanations), and post to the two T-accounts.
2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000.
Show how net accounts receivable would be reported on the balance sheet at
that date.
In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?
How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
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