When is bad debts expense recorded when using the direct write-off method?
Under the direct write-off method, bad debt expenses are recorded in respect of receivable when it is expected that it will never get collected.
Accounts receivables refer to the amount for which sales are made, but payment is still pending from the customer.
When the business entity uses the direct write-off method, it will record the bad debts expenses when they expect that the amount due from the customer’s end will never get collected.
On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only $5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.
1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.
2. What are some limitations that Best Performance will encounter when using the direct write-off method?
Applying the direct write-off method to account for uncollectibles
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account for uncollectible receivables.
At April 30, 2018, Valley’s accounts receivable totaled $19,000. During May, she earned revenue of $22,000 on account and collected $15,000 on account. She also wrote off uncollectible receivables of $1,100 on May 31, 2018.
1. Use the direct write-off method to journalize Valley’s write-off of the uncollectible receivables.
2. What is Valley’s balance of Accounts Receivable at May 31, 2018?
Unique Media Sign Incorporated sells on account. Recently, Unique reported the following figures:
Net Credit Sales
Net Receivables at end of year
1. Compute Unique’s days’ sales in receivables for 2018. (Round to the nearest day.)
2. Suppose Unique’s normal credit terms for a sale on account are 2/10, net 30. How well does Unique’s collection period compare to the company’s credit terms? Is this good or bad for Unique?
Question: On December 1, Kyle Corporation accepted a 60-day, 9%, $12,000 note receivable from J. Michael in exchange for his account receivable.
1. Journalize the transaction on December 1.
2. Journalize the adjusting entry needed on December 31 to accrue interest revenue. Round to the nearest dollar.
3. Journalize the collection of the principal and interest at maturity. Specify the date. Round to the nearest dollar.
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