Uncollectible - Direct Write-Off and Allowance

Question 1

What are the two methods used to account for Bad Debt Expense?

Answer 1

1. ) Direct write off method

2. ) Allowance Method

Question 2

What is the direct write-off method used to account for Bad Debt Expense?

Answer 2

Records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Can be used only when the firm is unable to estimate uncollectible accounts receivable reliability. Most large firms do not use this method.

Question 3

What are the negative aspects of using the Direct write-off method when accounting for Bad Debt Expense?

Answer 3

1. ) A/R is overvalued on the B/S
2. ) Because the direct write off method has poor balance-sheet valuation and matching of revenues and expenses (booking revenue one year and bad debt in subsequent year), it is not in accordance with GAAP unless there is no basis for estimating bad debts.

Question 4

What are the positive aspects of using the Direct write-off method when accounting for Bad Debt Expense?

Answer 4

1. ) May not be materially different on a company’s F/S

2. ) Simple and Practical to use

Question 5

What is the normal entry for the Direct Write-off method when accounting for Bad Debt Expense?

Answer 5

when deemed uncollectible
DR. Bad Debt Expense
CR. A/R

When that account is collected
DR. Cash
CR. Bad Debt Recovered

Question 6

Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?

Answer 6

The Allowance method.

Question 7

What is the allowance method used to account for Bad Debt Expense?

Answer 7

Method of choice for most large firms. Records an estimate of Bad Debt Expense at the end of each year in an adjusting entry. Both income and net A/R are reduced in the year of sale by the estimate of uncollectible accounts on the year’s sales.

Question 8

What are the positive aspects of using the Allowance method for Bad Debt Expense?

Answer 8

1. ) Allows companies to value A/R at net realizable value on the B/S
2. ) Allows companies to recognize the revenues and expenses from credit sales in the same accounting year.

Question 9

What is the typical End of Period adjusting entry when using the Allowance method for Bad Debt Expense?

Answer 9

DR. Bad Debt Expense

CR. Allowance for Doubtful Accounts

Question 10

What is the typical “Write-off of Uncollectible Accounts” entry when using the Allowance method for Bad Debt Expense?

Answer 10

DR. Allowance for Doubtful Accounts
CR. A/R

No effect on income or net assets

Question 11

What is the typical Recovery of accounts previously written off adjusting entry when using the Allowance method for Bad Debt Expense?

Answer 11

DR. A/R
CR. Allowance for Doubtful Accounts

DR. Cash
CR. A/R