Question

Martin Rorke is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end of the year (December 31). Martin is also reviewing evidence showing that another customer that had a large balance at year-end unexpectedly declared bankruptcy on January 10.

Analyze how this information should be reflected in the financial statements.

Answer 1

Under allowance method,

At December 31:

several receipts listed from customers that were considered doubtful at the end of the year should be treated as 'Uncollectibles' .

That uncollectible amount should be the credit balance of 'Allowance for doubtful account' at December 31 and respective amount charged to 'income statement' as 'Bad debt expense'.

At January 10:

If customer declared bankruptcy then that amount should be written off. Credited to 'Accounts receivable account' and Debited to 'Allowance for doubtful account'

.

Under Direct write off method:

At December 31:

No impact on financial statements

At January 10:

If customer declared bankruptcy then that amount should be written off as bad debt. Debit 'bad debt expense' account and Credit 'Accounts receivable account'.