On June 1, 2018, Best Performance Cell Phones sold \(21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only \)5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.

Requirements

1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

2. What are some limitations that Best Performance will encounter when using the direct write-off method?

Step 1:Journal entry of the transactions

Violates the Matching Principle

The matching principle states that the related expenses need to be provided with a related income. In the direct write-off method, bad debts are charged only when a company determines that a customer will not pay in the future, irrespective of the revenue booked.

Profitability may not accurate

As expenses are not matched with the revenue, expenses provision will shift from one year to another year. Due to this, correct profitability may not be presented in financial statements.

Overstatement of Accounts receivable

Accounts Receivable will be overstated as a company’s accounts receivables may contain the uncollectible portion but the related provisions were not made or not written off.