Question

The statement of financial position of Dai Sing Ltd as at 31 December 2016 showed a balance in Accounts Receivable of $1,753,800, and a credit balance in Allowance for Doubtful Accounts of $210,456.

During the financial year ended 31 December 2017, the following transactions occurred: sales on account $5,566,300; sales returns $340,000; collections from customers $5,072,800; accounts written off $209,000; discount allowed $8,800; and collection of previously written off accounts of $57,000.

Required

a      ‘The direct write-off method of accounting for uncollectible accounts is an inappropriate method to match revenues and expenses.’ Discuss.

b      If the company uses the percentage of sales method to estimate bad debts expense and anticipates 5% of net sales to be uncollectible, what is the adjusting entry at 31 December 2017?

c      Prepare the accounts receivable account for the year 2017.

d      If the company uses the percentage of receivables method to estimate bad debts expense and determines that uncollectible accounts amount to 8% of accounts receivable, what is the adjusting entry at 31 December 2017?

Answer 1

a)	Under the direct write-off method of accounts receivable, the accounts that are considered
	to have become bad, are written off directly to bad debts expense account. This would mean
	that
	i) The amounts written off may relate to prior years, and
	ii) No amount is provided for, for the expected bad debts expense of the current year.
	As a result the sales of any period are not getting matched with the bad debts (though
	estimated) of the same period. This is against the matching principle.
b)	Adjusting entry would be:
	Bad debts expense	261315
	Allowance for Doubtful Accounts [5% of (5566300-340000)]		261315
c)		Debit	Credit	Balance
	Beginning balance			1753800
	Sales	5566300		7320100
	Collections		5072800	2247300
	Sales returns		340000	1907300
	Discounts allowed		8800	1898500
	Previously written off acounts reinstated	57000		1955500
	Previously written off acounts collected		57000	1898500
d)	Adjusting entry would be:
	Bad debts expense	151764
	Allowance for Doubtful Accounts [8% of 1898500-(210456-209000)]		151764