Question

You have obtained the following information about Rossburn Inc. (Rossburn) from its 2017 annual report:
i. Rossburn's year-end is September 30.
ii. Sales for the year ended September 30, 2017 were $750,000; 85 percent of sales are credit sales.
iii. The balance in accounts receivable on September 30, 2017 was $145,000.
iv. The balance in allowance for uncollectible accounts on September 30, 2016 was $13,500.
v. During fiscal 2017, Rossburn wrote off $18,000 of accounts receivable.
vi. The bad debt expense can be estimated as 2.5 percent of credit sales or 10 percent of year-end accounts receivable.
vii. Net income for the year ended September 30, 2017, including all revenues and expenses except for the bad debt expense, was $45,000.

Required:
a. Determine the bad debt expense for the year ended 2017, assuming that Rossburn used:
i. The direct-writeoff method for accounting for uncollectible accounts.
ii. The percentage-of-credit-sales method for accounting for uncollectible accounts.
iii. The percentage-of-receivables method for accounting for uncollectible accounts.
b. What would be the balance in allowance for uncollectible accounts on September 30, 2017 using the three methods identified in (a)?
c. Prepare the journal entry required to record the bad debt expense under each of the Three methods identified in (a).
d. What would net income be for 2017 under each of the three methods in (a)?
e. Explain why the three methods in (a) provide different bad debt expenses.
f. Which method of determining the bad debt expense and the allowance for uncollectible accounts is best? Explain.



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  • CreatedFebruary 26, 2015
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