P9-2A Information related to Hermesch Company for 2008 is summarized below. Tota
ID: 2434597 • Letter: P
Question
P9-2A Information related to Hermesch Company for 2008 is summarized below.Total credit sales 2,200,000
Accounts receivable at December 31 825,000
Bad debts written off 33,000
Instructions
(a) What amount of bad debts expense will Hermesch Company report if it uses the direct writeoff
method of accounting for bad debts?
(b) Assume that Hermesch Company estimates its bad debts expense to be 2% of credit sales.
What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful
Accounts credit balance of $4,000?
(c) Assume that Hermesch Company estimates its bad debts expense based on 6% of accounts
receivable.What amount of bad debts expense will Hermesch record if it has an Allowance
for Doubtful Accounts credit balance of $3,000?
(d) Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance for
Doubtful Accounts.What amount of bad debts expense will Hermesch record?
(e) What is the weakness of the direct write-off method of reporting bad debts expense?
Explanation / Answer
(a) What amount of bad debts expense will Hermesch Company report if it uses the direct writeoff method of accounting for bad debts?
It would be the same as the amount written off, which is $33,000.
Answer: $33,000.
(b) Assume that Hermesch Company estimates its bad debts expense to be 2% of credit sales.
What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $4,000.
2% of credit sales = 0.02*2,200,000 = $44,000
Answer: $44,000
(c) Assume that Hermesch Company estimates its bad debts expense based on 6% of accounts receivable.
What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $3,000?
6% of accounts receivable = 0.06*825,000 = 49,500. Since the allowance account already has a credit balance of 3,000, and they want a credit balance of 49,500, they will record 49,500 – 3,000 = 46,500.
Answer: $46,500
(d) Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance for Doubtful Accounts.
What amount of bad debts expense will Hermesch record?
In this case, they have a debit balance of 3,000 and they want a credit balance of 49,500, so they will recognize 49,500 + 3,000 = 52,500
Answer; $52,500.
(e) What is the weakness of the direct write-off method of reporting bad debts expense?
Matching principle – does not match expenses with revenues as well as the allowance methods.
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