Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on thebalance sheet

On August 31, 2018, Forget-Me-Not Floral Supply had a \(140,000 debit balance inAccounts Receivable and a \)5,600 credit balance in Allowance for Bad Debts. DuringSeptember, Forget-Me-Not made the following transactions:

• Sales on account, \(530,000. Ignore Cost of Goods Sold.

• Collections on account, \)573,000.

• Write-offs of uncollectible receivables, $6,000.

Requirements

1. Journalize all September entries using the allowance method. Bad debts expense wasestimated at 2% of credit sales. Show all September activity in Accounts Receivable,Allowance for Bad Debts, and Bad Debts Expense (post to these T-accounts).

2. Using the same facts, assume that Forget-Me-Not used the direct write-off methodto account for uncollectible receivables. Journalize all September entries using thedirect write-off method. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.

3. What amount of Bad Debts Expense would Forget-Me-Not report on its Septemberincome statement under each of the two methods? Which amount better

matches expense with revenue? Give your reason.

4. What amount of net accounts receivable would Forget-Me-Not report on its September

30, 2018, balance sheet under each of the two methods? Which amount ismore realistic? Give your reason

Step by step solution

01

Definition of bad debts

Bad debt is the amount that is not received from the customers. The amount of the bad debt occurs when the company sold goods on credit to customers

02

Allowance method

Date	Particulars	Debit	Credit
September 30	Accounts Receivable	$530,000
	Sales Revenue		$530,000
	(To entry to record sale)
September 30	Cash	$573,000
	Accounts Receivable		$573,000

	(To entry to record the cash receipts)
September 30	Allowance for Bad Debts	$6,000
	Accounts Receivable		$6,000
	(To entry to record allowance)
September 30	Bad Debt Expense	$10,600
	Allowance for Bad Debts		$10,600
	(To entry to record bad debt expense)

Accounts Receivable
Balance September 1, 2018	$140,000	Cash	$573,000
Sales Revenue	$530,000	Allowance for bad debts	$6,000
Balance September 30, 2018	$91,000

Allowance for Bad Debts Account
Accounts Receivable	$6,000	Balance September 1, 2018	$5,600
		Bad Debts Expense	$10,600
		Balance September 30, 2018	$10,200

Bad Debt Expense
Allowance for Bad Debts	$10,600

03

Direct write-off

Date	Particulars	Debit	Credit
September 30	Accounts Receivable	$530,000
	Sales Revenue		$530,000
	(To entry to record sale)
September 30	Cash	$573,000
	Accounts Receivable		$573,000
	(To entry to record the cashreceipts)
September 30	Bad Debts Expense	$6,000
	Accounts Receivable		$6,000
	(To entry passed to record allowance)

Bad Debt Expense
Details	Debit	Details	Credit
Accounts Receivable	$6,000

Accounts Receivable
Details	Debit	Details	Credit
Balance September 1, 2018	$140,000	Cash	$573,000
Sales Revenue	$530,000	Bad Debt Expense	$6,000
Balance September 30, 2018	$91,000

04

Income statement

Allowance Method:

Income Statement: $10,600

Direct Write-off Method:

Income Statement: $6,000

The allowance method best matches bad debt expenses with revenue because the allowance method bad debt expenses are estimated and recorded before the occurrence of bad debts. It records the bad debt expense in the same year of sale.

05

Balance sheet

Amount of accounts receivable shown in the balance sheet:

Allowance method: $80,800

Balance sheet extract as on 30 September 2018
ASSETS
CURRENT ASSETS
Accounts receivable	$91,000
Less: allowance for bad debts	($10,200)
	$80,800

Direct write-off method: $91,000

The net allowance method is more correct because it shows the right amount of receivables.

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