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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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A method of estimating bad debts that focuses on the income statement rather than the balance sheet is the allowance method based on:

  1. a. direct write-off
  2. b. aging the trade receivable accounts
  3. c. credit sales
  4. d. the balance in the trade receivable accounts

To determine

Identify the allowance method that is based on the method of estimating the bad debt that focuses on the income statement rather than balance sheet.

Explanation

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated, and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for bad debt account.

Justification for the incorrect answer:

Option a:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible. Hence, option a is an incorrect answer.

Option b:

A method of determining the estimated uncollectible receivables, based on the age of individual accounts receivable is known as aging of receivables method...

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