Chapter 8, Problem 8.4BP

(a)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Percentage-of-receivables basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of receivables for a specific period.

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts, by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To determine: The amount would be reported as bad debt expense, if Company O uses the direct write-off method of accounting for bad debts.

(b)

To determine

The amount of bad debts expense would be recorded by Company O.

Given:

Balance in allowance for doubtful accounts is a credit of $3,700.

Bad debt expense is 4% of accounts receivable.

(c)

To determine

The amount of bad debts expense would be recorded by Company O.

Given: Balance in allowance for doubtful accounts is a debit of $2,000.

Bad debt expense is 4% of accounts receivable.

(d)

To determine

To describe: The weakness of reporting bad debt expense under direct write-off method.