Question

Sheridan follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts. All of Sheridan’s sales are on a 30-day credit basis. Sales for the current year total $2,200,000. The balance in Accounts Receivable at year-end is $93,100 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance). (b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach? Assume that accounts written off were for sales in a prior year. Net income would be $

Answer 1

Answer:

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?

• Increase the amount of a company's net loss by $ 11.172.  

Explanation:

• Initial Balance  

Sales $ 2,200,000

Dr Accounts Receivable  $ 93,100

12% Uncollectible $ 11,172

• (b) By what amount would net income differ if bad debt  

expense was computed using the percentage-of-receivables approach?  

Dr Bad Debt Expense $ 11,172

Cr Allowance for Uncollectible Accounts $ 11,172

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of accounts receivables as CREDIT.

With this method the Bad Debt Expenses account are reported as expenses in the income statement, this account increase the amount of a company's net loss, in this case the impact it's a loss of $11,172 .

Bad accounts are those credits granted by the company and there is no possibility of being charged.

"When customers buy products on credits but the company cannot collect the debt, then it's necessary  to cancel the unpaid invoice as uncollectible."

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets.  

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit) .

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.