Muhammad Haris Nawaz

22348
Principles of Accounting
AR and Bad Debts Assignment
Q 1.
Why do we have to estimate bad debt expense? An estimate is always a some what inaccurate
figure. Why can’t we wait for the actual default to occur for passing the entry for recording bad
debt expense when we are more sure about the correct bad debt amount?

ANSWER
In order to comply with the matching principle, bad debt expense must be
estimated using the allowance method in the same period in which the sale occurs.
Even though estimate is a somewhat incorrect amount, we have to estimate
allowance for bad debts in the same period to anticipate future losses to comply with
matching principle.

Q 2.
DATE ACCOUNT TITLE LP DEBIT CREDIT

A Dec 31 Uncollectible accounts expense 30610

Allowance for doubtful accounts 30610
b) Mar 31 Allowance for doubtful accounts 1000
Account Receivable 1000
c) May 31 Account receivable 1000
Allowance for doubtful accounts 1000

May 31 Cash 1000

Account receivable 1000
Dec 31 Uncollectible accounts expense 29400
Allowance for doubtful accounts 29400
Q 3.
What is Direct Write off method for charging bad debt expense? Why is this method not
recommended, Other methods (like Percentage of Credit Sales and Percentage of Receivables)
are considered more appropriate even though those methods give estimates of bad debts
expense which are not hundred percent accurate? Why do we use inaccurate methods?

ANSWER

Write off method for charging bad debts refers to reducing the amount of account
receivable directly when we think a certain account receivable is uncollectible or a certain
customer will default. It’s not recommended because the matching principle requires that
expenses be matched to related revenues in the same accounting period in which the
revenue transaction occurs and we don’t know which customer will default and when.
A direct write off method for charging bad debt expense refers to reducing the value of
account receivable with the exact amounts of uncollectible accounts. This method is not
recommended because even though the direct write-off method records the exact
amounts of uncollectible accounts, it fails to uphold the matching principle used
in accrual accounting and generally accepted accounting principles (GAAP). 
For this reason, bad debt expense is calculated using the allowance method,
which provides an estimated dollar amount of uncollectible accounts in the same period
in which the revenue is earned. It is estimated by using methods like percentage of
credit sales and percentage of receivables which are just estimates and not hundred
percent accurate.

Q 4.
a)
NUMBER OF DAYS OUTSTANDING

TOTAL 0-30 31-60 61-90 91-120 OVER 120

Account receivable 375000 220000 90000 40000 10000 15000

% uncollectible 1% 4% 5% 8% 10%

Estimated bad debts 10100 2200 3600 2000 800 1500

b)
DATE ACCOUNT TITLE LP DEBIT CREDIT

A) Dec 31 Uncollectible accounts expense 18100

Allowance for doubtful accounts 18100

9-1
The controlling account shows a debit of 930,000 for 100 customers in which 99
showed debit balance and one customer showed credit balance of 45000.
We will show this in balance sheet as follows
Account receivable 930000
Less: allowance for doubtful accounts (45000) 885000
We did this because the credit balance of customer shows that we are doubtful
that this customer will be unable to pay off his debt to us.

9-2
a)
DATE ACCOUNT TITLE LP DEBIT CREDIT

Dec 31 Uncollectible accounts expense 680

Allowance for doubtful accounts 680
b)
DATE ACCOUNT TITLE LP DEBIT CREDIT

Dec 31 Uncollectible accounts expense 3032

Allowance for doubtful accounts 3032

9-3
a) Uncollectible account expense = 1% of 576000 = 5760
b) Uncollectible account expense= 1.5% of 576000(0.75) = 6480
c) Uncollectible account expense= 3% of 144000 = 4320

9A-2
 DATE ACCOUNT TITLE LP DEBIT CREDIT

Jan 31 Account receivable 180000

Sales 180000
Jan 31 Sales return and allowance 3600
Account receivable 3600
Jan 31 Cash 177600
Account receivable 177600
Jan 31 Allowance for doubtful account 840
Account receivable 840
Jan 31 Bad debt expense 2440
Allowance for doubtful accounts 2440

MILE HI CORPORATION

PARTIAL BALANCE SHEET

AS ON JAN 31

ASSETS EQUITIES
CURRENT ASSETS
ACCOUNT RECEIVABLE 249120
ALLOWANCE FOR DOUBTFUL ACCOUNTS (13800) 235320

c)
GENERAL JOURNAL
DATE ACCOUNT TITLE LP DEBIT CREDIT

Dec 31 Account receivable 3840

Allowance for doubtful accounts 3840
Dec 31 Cash 3840
Account receivable 3840