CA7-3. (Bad-Debt Reporting Issues) Clark Pierce conducts a wholesale merchandisi

Question

CA7-3. (Bad-Debt Reporting Issues) Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt rate has been approximately 1½% of sales. In recent discussions with his bookkeeper, Mr. Pierce has become confused by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance. The following information has been presented to Pierce.

1.An allowance can be set up (a) on the basis of a percentage of receivables or (b) on the basis of a valuation of all past due or otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at the close of the accounting period, or specific items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year in which they are determined to be uncollectible.

2.Collection agency and legal fees, and so on, incurred in connection with the attempted recovery of bad debts can be charged to (a) Bad Debt Expense, (b) Allowance for Doubtful Accounts, (c) Legal Expense, or (d) Administrative Expense.

3.Debts previously written off in whole or in part but currently recovered can be credited to (a) Other Revenue, (b) Bad Debt Expense, or (c) Allowance for Doubtful Accounts.

Instructions Which of the foregoing methods would you recommend to Mr. Pierce in regard to (1) allowances and charge-offs, (2) collection expenses, and (3) recoveries? State briefly and clearly the reasons supporting your recommendations.

Explanation / Answer

Answer

(1) allowances and charge-offs

Thee should be charged to bad debt expense in the year in which they are determined to be uncollectible.. This is because all such allowance and charge - off represents a charge against profits

2. Collection Agency and legal fees :- These should be charged to legal expenses since clearly these are incurred in nature of expenses by way of legal action for recovery of bad debts.

3.Debts previously written off in whole or in part but currently recovered can be credited to bad debt expense since they need to be credited to the same account debited at the time they were incurred viz. the bad debts expense and bad debts expense will be either squared off or be reduced depending on full or partial recovery respectively.

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