Week two Individual Assignment
March 13, 2014
Professor: Jeff Hough
Question 3 and 4
What are the essential features of the allowance method of accounting for bad debts?
1. The essential features of the allowance method of accounting for bad debts are uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues occurred.
2. Estimated uncollectible are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period (Kimmel, P, Weygandt, J., & Kieso, D. 2007).
3. Debiting actual uncollectibles to allowance for doubtful accounts and credit them to accounts receivable at the time the specific account is written off as uncollectible.
Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren
The cash realizable value does not decrease when an uncollectible account is written off under the allowance method because the cash realizable value is estimated uncollectibles are accounted for in an adjusting entry. And, the write-offs reduce the accounts receivable and allowance for doubtful accounts by an equal amount.
Age of Accounts Uncollectible
1–30 days past due 7
31–90 days past due 30
Over 90 days 50
(A) Bad Debts Expense
[($400,000 X 2%) – $1,500] 6,500
Allowance for Doubtful Accounts 6,500