Answer to Question #216135 in Accounting for zuby

Question

Assume that Nuance in number 1 above used the percentage of receivables method to estimate uncollectible accounts instead of the percentage of sales method. Nuance assumes that 5 percent of accounts receivable will never be collected.

1.

Prepare the entry to record Nuance’s bad debt expense for the year.

2.

Show how the net accounts receivable balance would be reported on the balance sheet.

3.

Why are companies allowed to choose between methods of estimating bad debts instead of being required to use one method?

Answer 1

1. Prepare the entry to record Nuance’s bad debt expense for the year

2. Show how the net accounts receivable balance would be reported on the balance sheet

Accounts Receivable $100,000 Uncollectible                        5%

Target allowance for doubtful accounts = 5,000

There are 1,000 already in doubtful accounts we need to be at 5,000 so the number to arrive at 5,000 is $4,000.

Net Receivables: $475,000

3. Why are companies allowed to choose between methods of estimating bad debts instead of being required to use one method?

Companies are allowed to make a choice, though most financial accounting is pretty standardized, companies are allowed to make estimations as long as they are determined by logical methods.