3) What are the essential features of the allowance method of accounting for bad debts?
The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues occurred. (2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts 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.
Lauren should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.
E8-5) Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.
Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100 $95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Al- lowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimates of bad debts are as shown below.
Age of Accounts Estimated % Uncollectible
1-30 days past due 7
31-90 days past due 30
Over 90 days 50
(a) Determine the