Question

An advantage of basing bad debt expense on the historical relationship between bad debts and net credit sales is that it provides the best information to the credit department to use in its collection activities. it considers the balance in the allowance account when making the bad debt expense estimate. it provides the best estimate of the net realizable value of accounts receivable. oit best adheres to principle of cause and effect recognition.
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Answer 1

Answers:

1. Option d : It best adheres to principle of cause and effect recognition.

Bad debt expenses needed to be added in income statement to get the profit of the firm.

2. Option a : the method overstates current sales and account receivable.

The gross price method for accounting cash discounts doesn't report the account receivable at the net realizable value. This method doesn't require more book keeping as cash discount is not accounted in books of accounts. So, the disadvantage of the gross method to record cash discounts is, it overstates the current sales and the accounts receivables at the end of the period.

3. Option a : writing off a specific receivable does not reduce the current ratio if the percentage of ending accounts receivable method is in use

4. Option d : recorded in separate accounts and separately reported on the balance sheet