Here is information related to Waterway Industries for 2017. Total credit sales

Question

Here is information related to Waterway Industries for 2017. Total credit sales $1,480,000 Accounts receivable at December 31 740,000 Bad debts written off 38,800

(a) What amount of bad debt expense will Waterway Industries report if it uses the direct write-off method of accounting for bad debts?correct answer 38800

(b) Assume that Waterway Industries decides to estimate its bad debt expense based on 4% of accounts receivable. What amount of bad debt expense will the company record if Allowance for Doubtful Accounts has a credit balance of $3,200?

(c) Assume the same facts as in (b), except that there is a $1,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debt expense will Waterway Industries record?

Explanation / Answer

a) Under Direct method, a bad debt is written off when a particular debt is deemed to be uncollectable. under this method Waterway industry should book bad debt expense for $38,800.

b) if the waterway industry decides to estiate bad debt expenses based on pecentage of accounts receivable, company would be creating a provision to meet the bad debts that may arise in the business.

then the company have to book the bad debt expense for ($740,000*4% -$3200)=$26400

c)in case there is a debit balance in allowance account the bad debt expense to be booked is ($740,000*4%+$1000)=$30,600

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