When a company has a policy of making sales for which credit is extended, it is reasonable toexpect a portion of those sales to be uncollectible. As a result of this, a company must recognizebad debt expense. There are basically two methods of recognizing bad debt expense: (1) directwrite-off method, and (2) allowance method.Instructions(a) Describe fully both the direct write-off method and the allowance method of recognizing baddebt expense.(b) Discuss the reasons why one of the above methods is preferable to the other and the reasonswhy the other method is not usually in accordance with generally accepted accountingprinciples.

Lets start with basic understanding. When business makes credit sales then there is chances that…

Answered: When a company has a policy of making…

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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Distinguish the difference between Bad Debts and Provision for Doubtful Debts, indicating the accounting treatment given to an increase/decrease in the Provision for Doubtful Debts and the impacts generally on Income Statements and Statements of Financial Statements.
Why does the Bad Debts Expense account usually not have the same adjusted balance as the Allowance for Doubtful Accounts?
8. When specified receivables are used to secure for a loan on a notification basis, which accounting treatment is required? Only a note to financial statement is required The borrower notifies the debtor that their receivables were assigned the borrower should not notify the debtor that their receivables were assigned Notify the debtor that their receivable was sold
Which following statement is a correct statement about the direct write-off method for calculating credit loss expense? A. It is in accordance with GAAP. B. It uses an allowance for credit losses account. C. It tends to understate accounts receivable on the balance sheet. D. It recognizes credit loss expense when a specific account is determined to be uncollectible.
Describe the allowance method used to estimate bad debts and the theoretical justification forits use.
TRUE OR FALSE?1. Valuation accounts also known as contra accounts or valuation reserve are neither assets nor liabilities. 2. A liability becomes payable on demand if an entity breaches a long-term loan agreement during the reporting period.
GAAP requires companies with a large amount of receivables to use the allowance method. True False
Which of the following is a limitation of the direct write-off method of accounting for uncollectibles? a. The direct write-off method overstates assets on the balance sheet. b. The direct write-off method does not match expenses against revenue very well. c. The direct write-off method does not set up an allowance for uncollectibles. d. All of the above
explain your answer and do not plagraized form anywhere
19.Which of the following statements is incorrect? a. Trade receivables are recognized simultaneously with the recognition of related revenue when the criteria for revenue recognition are met. b. Under the gross price method, sales discounts are reported as a deduction from sales revenue. c. When accounts receivable are pledged against borrowing, the amount of accounts receivable pledged shall be included in the total receivables with disclosures. d. When discounting notes, the term discount period refers to the period of time that the note has been held by the endorser or payee; i.e. the period from the date of the note up to the date of discounting.
Recording bad debt expense under the allowance method will have what effect on the financial statements? Select one: a. Profit is unchanged and total assets decrease b. Profit decreases and total assets is unchanged c. Profit is unchanged and total assets is unchanged d. Profit increases and total assets decrease e. Profit decreases and total assets decrease
Several accounts are listed below a. Purchases Returns and Allowances b. Sales Discounts c. Wages Expense d. Allowance for Doubtful Accounts e. Unearned Rent f. Income Taxes Payable g. Dividends Distributed h. Interest Revenue i. Inventory REQUIRED: List the accounts above that would normally have a credit balance

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