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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Bad Debt Expense

When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result, a company must recognize bad debt expense. The two methods of recognizing bad debt expense are the (1) direct write-off method and (2) allowance method.

Required:

  1. 1. Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense.
  2. 2. Explain the reasons why one of these methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.

1.

To determine

Explain briefly the concept of direct written-off method and allowance method that are used in recognizing bad debt expense.

Explanation

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.

  • Bad debts are recognized using two methods direct write -off method and allowance method. Under the direct write-off method helps in identifying the balances that are uncollectible before the bad debts are being recognized. When a particular account is considered to be uncollectible it is removed from the accounts receivable account and the corresponding amount of bad debt expense is recognized.
  • Allowance method helps the company to forecast the expected future bad debts in the accounts receivable account...

2.

To determine

Provide the reason for preferring one method over another and also explain the reason for the other method not being in accordance with the generally accepted accounting principles.

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