Question

On June ​1, 2018​, Perfect Performance Cell Phones sold $ 17,000 of merchandise to Ashton Trucking Company on account. Ashton fell on hard times and on July 15 paid only $ 6,000 of the account receivable. After repeated attempts to​ collect, Perfect Performance finally wrote off its accounts receivable from Ashton on September 5. Six months​ later, March ​5, 2019​, Perfect Performance received Ashton's check for $ 11,000 with a note apologizing for the late payment.
Requirements:
1. Journalize the transactions for High Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.
2. What are some limitations that High Performance will encounter when using the direct write-off method?

Answer 1

Answer:

See answers and explanation below.

Explanation:

1. Journalize the transactions for High Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

Date          Details                                 Dr ($)               Cr ($)              

1 Jun. 18    Account receivable           17,000

                 Sales revenue                                            17,000

                 To record sales to Ashton Trucking Company on account.

15 Jul. 18   Cash                                     6,000

                  Account receivable                                    6,000

                 To record cash received from Ashton Trucking Company.  

5 Sep. 18   Bad debt                              11,000

                 Account receivable                                      11,000

                To record accounts receivable from Ashton written off.      

5 Mar. 19   Account receivable              11,000

                 Bad debt                                                       11,000

                To record transfer of bad bad back toaccounts receivable.    

5 Mar. 19   Cash                                     11,000

                  Account receivable                                    11,000

                 To record cash received from Ashton Trucking Company.  

2. What are some limitations that High Performance will encounter when using the direct write-off method?

a. It is not in line with the matching principle. This is because bad debt expenses will not be reported in the same period they are incurred and might not be realized as bad expenses until the following period.

b. It can cause inaccurate balance sheet as it does give the actual amount of accounts receivable of a company.

c. It method of recording violates GAAP and financial statements does to present the actual financial performance of the business.

d. It overstates accounts receivable as the full amount of amount owed to the company from credit sales will be reported as accounts receivable.