Intermediate Case 1

In: Business and Management

Submitted By aj027
Words 488
Pages 2
Alfred Auletta

16 September 2012

Professor Shahid

ACC 301

CA 7-1 (Bad-debt Accounting)

A. What are the deficiencies of the direct write-off method?
The deficiency of the direct write-off method is that it fails to match the costs with the revenues in a specific period. It also does not show the net realizable value of receivables in the balance sheet. The only time that the direct write-off method is appropriate is when the amount that is uncollectible is deemed immaterial.

B. What are the two basic allowance methods used to estimate bad debts, and what is the theoretical justification for each?
The two basic allowance methods used to estimate the bad debts are the Percentage-of-sales approach and the Percentage-of-receivables approach. With the percentage-of-sales approach, the expense is getting matched with the revenue because it is showing the relation between the charge and the sale in a specific period. Using this method, it is being shown the past relationship between the sales and costs in a period. Simms Company would be anticipating for the future based on the costs and revenues. It is also known as the Income Statement Approach. When using the percentage-of-receivables approach, the company could find out what percentage of their receivables would be deemed uncollectible. The Simms Company would find out the actual value of their receivables instead of having to wait. The difference between this method and the other is the fact that it does not match costs and revenues but it will report the net realizable value of the receivables. When using this approach they need to use a composite rate or an aging schedule. These show certain dates and how much would be uncollectible. It is also known as the Balance Sheet Approach.

C. How should Simms account for the collection of the specific accounts previously written off…...

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