The statement of financial position of Dai Sing Ltd as at 31 December 2016 showe

Question

The statement of financial position of Dai Sing Ltd as at 31 December 2016 showed a balance in Accounts Receivable of $1,753,800, and a credit balance in Allowance for Doubtful Accounts of $210,456.

During the financial year ended 31 December 2017, the following transactions occurred: sales on account $5,566,300; sales returns $340,000; collections from customers $5,072,800; accounts written off $209,000; discount allowed $8,800; and collection of previously written off accounts of $57,000.

Required

a      ‘The direct write-off method of accounting for uncollectible accounts is an inappropriate method to match revenues and expenses.’ Discuss.

b      If the company uses the percentage of sales method to estimate bad debts expense and anticipates 5% of net sales to be uncollectible, what is the adjusting entry at 31 December 2017?

c      Prepare the accounts receivable account for the year 2017.

d      If the company uses the percentage of receivables method to estimate bad debts expense and determines that uncollectible accounts amount to 8% of accounts receivable, what is the adjusting entry at 31 December 2017?

Explanation / Answer

a) Under the direct write-off method of accounts receivable, the accounts that are considered to have become bad, are written off directly to bad debts expense account. This would mean that i) The amounts written off may relate to prior years, and ii) No amount is provided for, for the expected bad debts expense of the current year. As a result the sales of any period are not getting matched with the bad debts (though   estimated) of the same period. This is against the matching principle. b) Adjusting entry would be: Bad debts expense 261315 Allowance for Doubtful Accounts [5% of (5566300-340000)] 261315 c) Debit Credit Balance Beginning balance 1753800 Sales 5566300 7320100 Collections 5072800 2247300 Sales returns 340000 1907300 Discounts allowed 8800 1898500 Previously written off acounts reinstated 57000 1955500 Previously written off acounts collected 57000 1898500 d) Adjusting entry would be: Bad debts expense 151764 Allowance for Doubtful Accounts [8% of 1898500-(210456-209000)] 151764

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