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 12% 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.
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 12% 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Question
Transcribed Image Text: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 12% 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.
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