The following list describes aspects of either the allowance method or the direct write-off method to account for bad debts. For each item listed, indicate if the statement best describes either the allowance (A) method or the direct write-off (DW) method
3. The write-off of a specific account does not affect net income.
The correct answer is the allowance method.
Net income is the type of income an organization earns after deducting its necessary expenditure from the total revenue earned through the sale of goods and services for a fiscal year.
When an organization is using the allowance method to record its bad debt in the books of accounts, the calculated realizable amount does not affect the net income of the organization earned during the period of an accounting year.
Jarden Company has credit sales of $3,600,000 for year 2017. On December 31, 2017, the company’s Allowance for Doubtful Accounts has an unadjusted credit balance of $14,500. Jarden prepares a schedule of its December 31, 2017, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here.
3. On June 30, 2018, Jarden Company concludes that a customer’s $4,750 receivable (created in 2017) is uncollectible and that the account should be written off. What effect will this action have on Jarden’s 2018 net income? Explain.
BTN 7-3 Anton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts.
1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
2. Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his rights as manager, or do you believe this action is an ethics violation? Justify your response.
3. What type of internal control(s) might be useful for this company in overseeing the manager’s recommendations for accounting changes?
Archer Co. allows select customers to make purchases on credit. Its other customers can use either of two credit cards: Commerce Bank or Goldman. Commerce Bank deducts a 3% service charge for sales on its credit card. When customers use the Goldman card, a 2% service charge is deducted from sales on its card. Archer completed the following transactions in August.
Aug. 4 Sold $3,700 of merchandise on credit (that had cost $2,000) to McKenzie Carpenter.
10 Sold $5,200 of merchandise (that had cost $2,800) to customers who used their Commerce Bank credit cards.
11 Sold $1,250 of merchandise (that had cost $900) to customers who used their Goldman cards.
14 Received Carpenter’s check in full payment for the purchase of August 4.
15 Sold $3,250 of merchandise (that had cost $1,758) to customers who used their Goldman cards.
22 Wrote off the account of Craw Co. against the Allowance for Doubtful Accounts. The $498 balance in Craw Co.’s account stemmed from a credit sale in November of last year.
Prepare journal entries to record the preceding transactions and events. (The company uses the perpetual inventory system. Round amounts to the nearest dollar.)
At December 31, 2017, Ingleton Company reports the following results for the year:
Cash sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,025,000
Credit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342,000
In addition, its unadjusted trial balance includes the following items:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . $575,000 debit
Allowance for doubtful accounts . . . . . . . . . . . . . 7,500 credit
3. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2017, balance sheet given the facts in part 1c
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