Question

Harry's Hardware estimates that approximately $1.75 out of every $100 of credit sales proves to be uncollectible. Barber calculates Bad-Debts Expense using the
a) direct write-off method.



b) income statement approach.



c) aging the Accounts Receivable approach.



d) balance sheet approach

Answer 1

Answer:

B) income statement approach.

Explanation:

The income statement approach (or sales approach) for calculating bad debts estimates the allowance for doubtful accounts using a percent (or fraction) of total credit sales.

Bad debt expense (expense account) is debited while allowance for doubtful accounts (contra asset account) is credited.

Answer 2

Answer: The correct answer is a) direct write-off method.

Explanation: There are basically two methods of recognizing a bad debt expense. One is direct write-off method, the other is allowance method. In the options provided, only the direct write-off method is present.

The direct write-off method tends to record the exact amount that is deemed uncollectible but does not align with the matching principle in accounting. However, the allowance method, is better used in the sense that it provides an estimate of the amount that is deemed uncollectible and records it in the same period when the revenue is earned.