Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 4 percent of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12 percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 6 percent, 31–90 days past due at 19 percent, and over 90 days past due at 26 percent. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. 2018 Year-End Total for Organics Plus Credit Sales $1,810,000 Accounts Receivable 600,000 There is also additional information regarding the distribution of accounts receivable by age. Past-Due Category Accounts Receivable Total 0-30 days $360,000 31-90 days 110,000 Over 90 days 170,000 Required: A. Prepare the year-end adjusting entry for bad debt, using the (1) income statement method, (2) balance sheet method of receivables, and (3) balance sheet aging of receivables method. Dec. 31 (1) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Dec. 31 (2) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Dec. 31 (3) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Feedback The income statement, balance sheet, and aged receivables approaches can generate different amounts. Remember that the percentages applied involve the sales (income statement approach) or the accounts receivables balance (balance sheet approach) or the total amount after applying the percentages for different aging ranges for the receivables that are potentially uncollectible. B. What would be the result obtained when you calculate the bad debt expense and required allowance for doubtful accounts using the three methods and assumptions above? a. The difference between the highest result and the lowest result is only $14,300. b. The aging method gives the lowest result; the income statement method the highest. c. The balance sheet method gives a result that is between that of the other two methods. d. The income statement result is generally considered more accurate than the other methods.

Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging of receivables method. If it uses the income statement method, bad debt would be estimated at 4 percent of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12 percent of accounts receivable. If it were to use the balance sheet aging of receivables method, it would split its receivables into three categories: 0–30 days past due at 6 percent, 31–90 days past due at 19 percent, and over 90 days past due at 26 percent. There is currently a zero balance, transferred from the prior year’s Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet. 2018 Year-End Total for Organics Plus Credit Sales $1,810,000 Accounts Receivable 600,000 There is also additional information regarding the distribution of accounts receivable by age. Past-Due Category Accounts Receivable Total 0-30 days $360,000 31-90 days 110,000 Over 90 days 170,000 Required: A. Prepare the year-end adjusting entry for bad debt, using the (1) income statement method, (2) balance sheet method of receivables, and (3) balance sheet aging of receivables method. Dec. 31 (1) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Dec. 31 (2) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Dec. 31 (3) Bad Debt Expense Bad Debt Expense Allowance for Doubtful Accounts Allowance for Doubtful Accounts Feedback The income statement, balance sheet, and aged receivables approaches can generate different amounts. Remember that the percentages applied involve the sales (income statement approach) or the accounts receivables balance (balance sheet approach) or the total amount after applying the percentages for different aging ranges for the receivables that are potentially uncollectible. B. What would be the result obtained when you calculate the bad debt expense and required allowance for doubtful accounts using the three methods and assumptions above? a. The difference between the highest result and the lowest result is only $14,300. b. The aging method gives the lowest result; the income statement method the highest. c. The balance sheet method gives a result that is between that of the other two methods. d. The income statement result is generally considered more accurate than the other methods.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

2018 Year-End Total for Organics Plus
Credit Sales	$1,810,000
Accounts Receivable	600,000

There is also additional information regarding the distribution of accounts receivable by age.

Past-Due Category	Accounts Receivable Total
0-30 days	$360,000
31-90 days	110,000
Over 90 days	170,000

Required:

A. Prepare the year-end adjusting entry for bad debt, using the (1) income statement method, (2) balance sheet method of receivables, and (3) balance sheet aging of receivables method.

Dec. 31 (1)	Bad Debt Expense	Bad Debt Expense
	Allowance for Doubtful Accounts	Allowance for Doubtful Accounts
Dec. 31 (2)	Bad Debt Expense	Bad Debt Expense
	Allowance for Doubtful Accounts	Allowance for Doubtful Accounts
Dec. 31 (3)	Bad Debt Expense	Bad Debt Expense
	Allowance for Doubtful Accounts	Allowance for Doubtful Accounts

Feedback

The income statement, balance sheet, and aged receivables approaches can generate different amounts. Remember that the percentages applied involve the sales (income statement approach) or the accounts receivables balance (balance sheet approach) or the total amount after applying the percentages for different aging ranges for the receivables that are potentially uncollectible.

B. What would be the result obtained when you calculate the bad debt expense and required allowance for doubtful accounts using the three methods and assumptions above?

a.	The difference between the highest result and the lowest result is only $14,300.
b.	The aging method gives the lowest result; the income statement method the highest.
c.	The balance sheet method gives a result that is between that of the other two methods.
d.	The income statement result is generally considered more accurate than the other methods.

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