Question

Zackie Company has recently allowed its customers to make purchases on credit. The terms are 2/10, n/30. Unfortunately, Zackie Company has found that not all of its credit customers pay their bills on time. Accordingly, Zackie Company has estimated an allowance for uncollectible accounts and matched this bad debt expense against credit sales. On Zackie Company’s financial statements, the allowance for uncollectible accounts is classified as a current liability.

1. State two accounting issues in this case.

2. Provide ASC Guidance for each issue along with a recommendation for each.

Answer 1

1. Two accounting issues are:
   1. The provision for bad debts should be part of operating expenses thus profits are higher here as this has been taken in balance sheet as current liability.
   2. Debtors will be overstated if provision for doubtful is not adjusted.
2. Asc guidelines

• Provision for bad debts should be calculated by using any two methods of income statement approach percentage of company total sales or balance sheet approach percentage of accounts receivable for a period and thus charge it to the income statement.