acc400 week one
Reading Responses Week 2
ACC400
August 12, 2014
Reading Responses Week 2
What are the essential features of the allowance method of accounting for bad debts? There are three essential features of the allowance method of accounting for bad debt. First, companies estimate uncollectible accounts receivables and match them against revenues in the same accounting period in which the revenues are recorded. Second, companies record estimated uncollectibles as an increase (a debit) to bad debts expense and an increase (a credit) to allowance for doubtful accounts through an adjusting entry at the end of each period. Lastly, companies debit actual uncollectibles to allowance for doubtful accounts and credit them to accounts receivable at the time the specific account is written off as uncollectible.
Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren. The reason the value of the cash realizable does not decrease because the write off occurs under the “allowance for doubtful accounts” and “accounts receivable”. A company should debit the bad debt write-off to the allowance account and not the Bad Debt Expense. The expense has already been recognized and should be adjusted accordingly.
E8-5 Hachey Company
(a) Current = 2% x $ 65,000 = $1,300; 1-30 days = 7% x $ 12,600 = $882; 31-90 days = 30% x $ 10,100 = $3,030; over 90 days = 50% x $ 7,400 = $3,700. The total is $8,912.
(b) Since there is already an entry under allowance for doubtful accounts of $2,200 the actual total is $6,712.
(c)
References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: John Wiley & Sons
ACC400
August 12, 2014
Reading Responses Week 2
What are the essential features of the allowance method of accounting for bad debts? There are three essential features of the allowance method of accounting for bad debt. First, companies estimate uncollectible accounts receivables and match them against revenues in the same accounting period in which the revenues are recorded. Second, companies record estimated uncollectibles as an increase (a debit) to bad debts expense and an increase (a credit) to allowance for doubtful accounts through an adjusting entry at the end of each period. Lastly, companies debit actual uncollectibles to allowance for doubtful accounts and credit them to accounts receivable at the time the specific account is written off as uncollectible.
Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren. The reason the value of the cash realizable does not decrease because the write off occurs under the “allowance for doubtful accounts” and “accounts receivable”. A company should debit the bad debt write-off to the allowance account and not the Bad Debt Expense. The expense has already been recognized and should be adjusted accordingly.
E8-5 Hachey Company
(a) Current = 2% x $ 65,000 = $1,300; 1-30 days = 7% x $ 12,600 = $882; 31-90 days = 30% x $ 10,100 = $3,030; over 90 days = 50% x $ 7,400 = $3,700. The total is $8,912.
(b) Since there is already an entry under allowance for doubtful accounts of $2,200 the actual total is $6,712.
(c)
References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: John Wiley & Sons
References: Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: John Wiley & Sons