Comparison of the direct write-off an allowance methods of accounting and ferbad

Question

Comparison of the direct write-off an allowance methods of accounting and ferbad debts
In its 1st year of business wicked wheels has a net income of a $146000 exclusive of any adjustment for badd day expense so far no adjustment has been made to write-off on close able accounts or to estimate badd debts the will of in datas are as follows

Write-off of uncollectible accounts during this year $10500
Net Credit sales $650000
Estimated percentage of net credit sales that Will be uncollected 2%

Required
Under the direct write off method net income is _____dollars and under the allowance method net income is ____dollars the ____ results in higher net income but the method of that should be used is the _____because this is the preferred method under accounting standers as it follows the _____ the direct write-off method should only be used in still mount of bad that is _____

Caloulator Print Item Chapters 6 and 7 Review AssignmeBook Comparison of the Direct Write-Off and Allowance Methods of Accou In its first year of business, Wicked Wheels ba uncollectible s net income of $146,000, exclusive of any adjustment for bad debts expense. So far, no adjustments have been made to write off accounts or to estimate bad debts. The relevant data are as follows: Write-offs of uncollectible accounts during the year Net credit sales Estimated percentage of net credit sales that will be uncollectible Required: $10,500 $650,000 2% The results in the higher net and under the allowance method, net income is Under the direct wite of method. net income is sand under the allowance method, nt income is ? ,The because this is the preferred method under accounting standards as it follows the income but the method that should be used is the direct write-off method should only be used if the amount of bad debts is

Explanation / Answer

Under the direct write off method net income is 135500 dollars and under the allowance method net income is 133000 dollars the decrease results in higher net income but the method of that should be used is the allowance method because this is the preferred method under accounting standerds as it follows the matching Principle the direct write-off method should only be used if the amount of bad debts is irrecoverable.

(Above Answers are given based on following calculations)

Direct Method –

Company uses direct method when there is no chance of receiving money from the debtor (Customer).

Journal Entry: Bad Debt (Debit) to Accounts Receivable (Credit)

Net Income Calculation:

Net income before Adjustment = 146000

(-) Bad debt                                  = 10500

Net Income = 135500

Journal Entry:

Bad Debt (Debit) – 10500

To Accounts Receivable (Credit) -10500

Indirect Method:

Net income is calculated by reducing estimated percentage of sale that is uncollectable from net income given. This method is used by companies that report in compliance with GAAP (Generally Accepted Accounting Principle).This is method is preferred method under accounting standards as it follows the matching Principle.

Journal Entry: Bad Debt (Debit) to Allowance for doubtful Accounts (Credit)

Net Income Calculation:

Net income before Adjustment = 146000

(-) Bad debt                                  = 13000 ( 650000*2%)

Net Income = 133000

Journal Entry:

Bad Debt (Debit) – 13000

To Allowance for doubtful Accounts (Credit) -13000

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