Question

information provided in tc). Compute bad debt amounts. P8-2A Information related to Mingenback Company for 2015 is summarized below. (LO 3) Total credit sales Accounts receivable at December 31 Bad debts written off $2,500,000 875,000 33,000 Instructions (a) What amount of bad debt expense will Mingenback Company report if it uses the (b) Assume that Mingenback Company estimates its bad debt expense to be 2% of credit (c) Assume that Mingenback Company estimates its bad debts pens based on 6%of direct write-off method of accounting for bad debts? sales. What amount of bad debt expense will Mingenback record if it has an Allow- ance for Doubtful Accounts credit balance of $4,000? accounts receivable. What amount of bad debt expense will Mingenback record if it has an Allowance for Doubtful Accounts credit balance of $3,000? for Doubtful Accounts. What amount of bad debt expense will Mingenback record? expense? (d )Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance (eWhat is the weakness of the direct write-off method of reporting bad debt

Answer 1

Solution a:

Amount of bad debt expense mingenback company report if it uses the direct write off method = Bad debts written off = $33,000

Solution b:

Estimated bad debts expense = 2% of credit sales

Therefore bad debt expense to be recorded = $2,500,000 * 2% = $50,000

Solution c:

Estimated bad debts expense = 6% of accounts receivables

= $875,000 *6% = $52,500

Balance in allowance for doubful accounts at December 31 = $3,000 Credit

Bad debts expenses to be recorded = $52,500 - $3,000 = $49,500

It is assumed that credit balance of $3,000 for allowance for doubtful accounts is after write off of bad debts of $33,000.

Solution d:

Estimated bad debts expense = 6% of accounts receivables

= $875,000 *6% = $52,500

Balance in allowance for doubful accounts at December 31 = $3,000 Debit

Bad debts expenses to be recorded = $52,500 + $3,000 = $55,500

It is assumed that debit balance of $3,000 for allowance for doubtful accounts is after write off of bad debts of $33,000.

Solution e:

Weakness of direct write off method:

1.  With the direct write-off method, bad debts expense might occur in a period after the initial sale was recorded, which violates the matching principle of generally accepted accounting principles. The matching principle requires a business to record revenues and their related expenses in the same accounting period.

2. Accounts receivable is an asset on the balance sheet that represents the money due from customer. Direct write-off method records the full amount of an account receivable at the time of a sale. But if some of these accounts become uncollectible, the reported accounts receivable balance would be too high.

3. Profit equals revenue minus expenses. Because a bad debt expense sometimes occurs in a later period than its related revenue, a company’s profits on its income statement might be inaccurate. Its profit would be too high when it records the revenue and too low when it records the related bad debt expense