BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

To determine

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 debts account.

Two methods to estimate uncollectible accounts under allowance method are:

  1. 1. Percentage of sales method, and
  2. 2. Analysis of receivables method.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

Analysis of receivables method:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.

To identify: The method which provides the most accurate estimate of the net realizable value of the receivables.

Explanation

Net realizable value is the net amount of receivables which a business expects to collect from its debtors. Net realizable value is the excess amount of accounts receivable over the allowance for doubtful accounts.

  • If percentage of sales method is followed consistently, then the old amount of uncollectible will get accumulated with the accounts receivable account itself, this would results in enormous increase in the balance of allowance for doubtful accounts than the required balance. Also, percentage of sales method doses not considers previous accounting period balance of allowance for doubtful accounts while making adjusting entry, thus leads to have an increased balance in allowance for doubtful accounts than the requirement...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Identify at least three alternatives for measuring liabilities.

Intermediate Accounting: Reporting And Analysis

What are some actions that stockholders can take to ensure that managements and stockholders interests are alig...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)