Question

1. Compare and contrast the direct write-off method and the allowance method for bad debts. At a minimum, please consider the following in your answer:

• When is the expense for uncollected accounts receivable recognized under each method?
• Why is the direct write-off method not considered to follow generally accepted accounting.

2.Why are the costs of plant/long term assets recovered through depreciation vs. expensed out during the period purchased? Choose one of the following depreciation methods to discuss: straight line, units of production, declining balance. Share how depreciation using this method is calculated and provide an example of when this would be the most ideal method for application.

3.What distinguishes a current liability from a long-term liability? Why is it so important to report these separately? How is this information used in decision making applications?

4.Define coupon and market/effective interest rates as they determine bond pricing at par, premium, or discount values.

5. What are the benefits of the corporation in comparison with the partnership and proprietorship structures? How is equity treated and reported differently in this structure?

Answer 1

As per policy, only one question is allowed to answer at a time, so here Q1 is being answered :

Answer 1)

Compare and contrast of direct write-off and allowance method of bad debts:

The direct write-off method is used at the time of when actually a customer defaults to pay receivables. Here, we do not record any provision under the Allowance for Doubtful Accounts to match with the revenues and receivables of a period. The direct write-off method violates the GAAP matching principle which says that revenues and their matching expenses will be recorded in the same period.

The allowance method for bad debts follows GAAP principle of matching the revenues of a period with its expenses. So, we estimate the uncollectible accounts at the end of the period to match with period’s receivables based on previous experience. Here we create a reserve called Allowance for Doubtful Accounts and book the Bad Debt Expense in each period. The reserve is carried forward in balance sheet till the point when the customer actually defaults.

	Direct write-off	Allowance method
Expense for uncollected accounts receivable recognised	when actually default from customer	In the period when receivables raised.
Acceptable under GAAP (generally accepted accounting principle)	Not accepted because it will discriminates between the net income of different periods. When bad debts written off, the net income reduces and Vice versa.	Accepted because here bad debt expense are booked in the same period whenever receivables raised.