Chapter 8, Problem 8.5BP

(a)(1)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

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.

Aging of receivables:

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

Allowance method:

It is a method for accounting bad debt expense, where amount of 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 doubtful account.

Direct write-off method:

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.

To prepare: The year-end adjusting entry to record the bad debt expense under each assumption.

(2)

To determine

Prepare adjusting journal entry at December 31, 2015 to record bad debt expense, if company estimates that its 2% of sales will be uncollectible.

(b)(1)

To determine

To repeat: Requirement (a), assume allowance for doubtful accounts has a debit balance of $1,100.

(2)

To determine

Prepare adjusting journal entry at December 31, 2015 to record bad debt expense, if company estimates that its 2% of sales will be uncollectible.

(c)

To determine

To prepare: The journal entry to write-off $3,200 of accounts receivable as uncollectible.

(d)

To determine

To prepare: The journal entry to write-off $3,200 of accounts receivable as uncollectible, under direct write-off method.

(e)

To determine

To describe: The advantages of using allowance method rather than direct write-off method in accounting for uncollectible accounts.