Question

Pauline’s Pottery has always used the direct write- off method to account for uncollectibles. The company’s revenues, bad debt write- offs, and year- end receivables for the most recent year follow:


The business is applying for a bank loan, and the loan officer requires figures based on the allowance method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.

Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2013 if Pauline’s Pottery were to use the allowance method for bad debts? Assume Pauline uses the percent-of-sales method.
2. How much of the receivables balance at the end of 2013 does Pauline’s Pottery actually expect to collect? (Disregard beginning account balances for the ­purpose of this question.)
3. Explain why net income is more or less using the allowance method versus the direct write- off method foruncollectibles.


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  • CreatedJanuary 16, 2015
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