Question

A large account receivable from taylor industries was considered fully collectible at september 30, year 5, the balance sheet date. taylor suffered a plant explosion on october 25, year 5. because taylor was uninsured, it is unlikely that the account will be paid. how should this event be presented in the entity’s financial statements?

Answer 1

Let us assume that the company Taylor Industries bought merchandise from X company. Taylor Industries will record Accounts Payable while X company will record Accounts Receivable. 

Since Taylor Industries will no longer be able to pay off its Account Receivable, X company will have to write off the Accounts Receivable. Writing off Accounts Receivable can be done in two ways.

1) Allowance method:
Bad Debt Expense                            xxxxx
               Allowance for Doubtful accounts           xxxxx
Writing Off Bad Debt:
Allowance for Doubtful Accounts       xxxxx
              Accounts Receivable                              xxxxx

2) Direct Write-off method.
Bad Debt Expense                             xxxxx
              Accounts Receivable                              xxxxx

In the books of Taylor Industries, it must recognize the cancellation of the Accounts Payable from the transaction with X company.

Accounts Payable                           xxxxx
              Other Income                                           xxxxx