Chapter 9, Problem E9.21E

To determine

Direct Write-off Method: Under this method, actual losses from uncollectible accounts are charged to Bad-Debt expense. This method contravenes the matching rule because Bad Debts are often recorded in the periods subsequent to sale. Therefore, this method can impact the Income Statement and Balance Sheet of an organization and is thereby, suggested to be used only when the Bad Debt losses are insignificant.

Allowance Method: This Method creates an allowance for doubtful debts at the end of each period by means of an adjustment entry. It is further categorized into two methods:

1. Percentage of Sales Method.

2. Aging of Receivables method.

Allowance method complies with the matching rule as expense relating to a particular period is charged against revenues of that particular period. Also, under this method, receivables are recorded at their Net Realizable Value at the end of each period. Therefore, this method should be used for Financial Reporting purposes when the Bad Debt losses are material.

To Indicate:

The journal entries as per Direct Write-off Method and Allowance Method in the books of Lima Company