Ex. 229 The Garv uncollectible accounts. Past experience will eventually be u at

Question

Ex. 229 The Garv uncollectible accounts. Past experience will eventually be u at December 31, 2011, and December 31, 2012, appear below ey Sign Company uses the allowance method in accounting for indicates that 5% of accounts receivable ncollectible or 1% of credit sales. Selected account balances Net Credit Sales CR. BALANCE Accounts Receivable DR.BALANCE $500,000 00,000 Instructions: Using the balance sheet method: (a) Record the following events in 2012. Aug. 10, 2012 Determined that the account of Kurt West for $700 is uncollectible Received a check for $300 as payment on account from Kurt West, whose account had previously been written off as uncollectible Oct.10, 2012 (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2012 assuming there is a zero balance in the allowance for doubtful accounts. (c) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2012 assuming there is a 1000 credit balance in the allowance for doubtful accounts. (d) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2012 assuming there is a 1000 debit balance in the allowance for doubtful accounts (e) What is the direct write off method and why is that method not GAAP. Why is the allowance write off method GAAP and is the preferred method over the direct write off method?

Explanation / Answer

Req a: Journal entries Date Accounts title and explanation Debit $ Credit $ 10-Aug Allowance for Uncollectible Account Dr. 700       Accounts receivable 700 10-Oct Accounts receivable Account Dr. 300     Allowance for Uncollectible Account 300 Cash Account Dr. 300    Accounts receivable 300 Req b: Date Accounts title and explanation Debit $ Credit $ Bad debts expense Account (500000*1%) 5,000    Allowance for uncollectible Account 5,000 Req c: Date Accounts title and explanation Debit $ Credit $ Bad debts expense Account (5000-1000) 4000    Allowance for Uncollectible Account 4000 Req D. Date Accounts title and explanation Debit $ Credit $ Bad debts expense Account (5000+1000) 6000    Allowance for Uncollectible Account 6000 Rreq e: The Direct method of recording bad debts is not recommended under GAAP due to the fact that the matching principle is not taken care of in this method. When the revenues are booked in the year of sales. however, the bad debts expense are recorded in year in which actually written off which may be different from the year of sales. This results in under/ overstated income of different year. This is the reason Allowance account is preferred over direct method. As it takes in the account the bad debbts as an expense in the year of sales on an past experience basis.

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