June 11, 2013
3. What are the essential features of the allowance method of accounting for bad debts?
The allowance method tries to match the written off account with the period in which the sale was made. There are three essential accounting features to the allowance method: 1. Uncollected debt for accounts receivable are matched against revenues within the same accounting period in which they are recorded. 2. Estimated uncollected debt are debited to bad debts expense and credited to Allowance for Doubtful Accounts via an adjusting entry at the end of each period. 3. Allowance for Doubtful Accounts are actually debited and credited to accounts receivable at the time the specific account is written off as uncollectible.
4. 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.
Cash realizable value does not change or decrease due to the decrease in cash the realizable value when uncollected estimates are accounted for in the adjusting entry. A write off for the uncollectible accounts will reduce both the accounts receivable and allowance for doubtful accounts to make them even.
a) Determine the total estimated uncollectible.
|Age of Accounts |Amount |Estimated Percentage |Estimated |
| | |Uncollectable |Uncollectable |
|Current |65,000 |2% |1,300 |
|1-30 days Past Due|12,600 |7% |882 |
|31-90 days Past |10,100 |30% |3,030 |
|Due | | | |
| Over 90 days |7,400 |50%