17E - Horngren'S Financial And Managerial Accounting

Question

On June 1, 2018, Best Performance Cell Phones sold \(21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only \)5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.

Requirements

1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

2. What are some limitations that Best Performance will encounter when using the direct write-off method?

Step-by-Step Solution

Answer

(1) The journal entries are recorded in Step 1.

(2) The three limitations of the direct write-off method are:

• It violates the Matching Principle
• The profitability may not accurate
• Overstatement of accounts receivable

Journal entry of the transactions

Step 1: Journal entry of the transactions

Date	Particulars	Debit	Credit
June 1	Accounts Receivables—Anthony	$21,000
	Sales Revenue		$21,000
	(Being sold goods on account)
June 15	Cash	$5,000
	Accounts Receivables—Anthony		$5,000
	(Being cash received from Anthony)
September 5	Bad Debt Expense	$16,000
	Accounts Receivable—Anthony		$16,000
	(Being accounts receivables become bad debt)
2019
March 5	Accounts Receivable—Anthony	$16,000
	Bad Debt Expense		$16000
	(Being entry reinstated of bad debts)
March 5	Cash	$16,000
	Accounts Receivable		$16,000
	(Being entry of bad debt recovered)

Limitations that Best Performance will encounter using the Direct Method.

Violates the Matching Principle

The matching principle states that the related expenses need to be provided with a related income. In the direct write-off method, bad debts are charged only when a company determines that a customer will not pay in the future, irrespective of the revenue booked.

Profitability may not accurate

As expenses are not matched with the revenue, expenses provision will shift from one year to another year. Due to this, correct profitability may not be presented in financial statements.

Overstatement of Accounts receivable

Accounts Receivable will be overstated as a company’s accounts receivables may contain the uncollectible portion but the related provisions were not made or not written off.