Resources: Financial Accounting: Tools for Business Decision Making

Ch. 8: Questions 3 & 4
3. What are the essential features of the allowance method of accounting for bad debts?

The essential features of the allowance method of accounting for bad debts are:
1. Estimating uncollectible accounts receivable and match in them against revenues in the same accounting period in which the revenues are recorded.
2. Recording estimated uncollectibles as an increase to bad debits expense and an increase is to allowance for doubtful accounts through an adjusting entry at the end of each period.
3. Debiting actual uncollectibles to allowance for doubtful accounts and credit them to accounts receivable at the time the specific account is written off as uncollectible.

4. Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren.

The cash realizable value does not decrease when an uncollectible account is written off under the allowance method because the cash realizable value is estimated uncollectibles are accounted for in an adjusting entry. And, the write-offs reduce the accounts receivable and allowance for doubtful accounts by an equal amount.

Ch. 8: Exercise E8-5

(a) Determine the total estimated uncollectibles.
|Age of | |Amoun| |Estimated |
|Accounts | |t | |Percentage |
| | | | |Uncollectible|
| |Allowance for Doubtful Accounts | | |6,712 |

(c) Discuss the implications of the changes in the aging schedule