QUESTION 1 (7 marks)

When a company has a policy of making sales for which credit is extended, it is reasonable to expect

a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt

expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off

method, and (2) allowance method.

Required:

(a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt

expense. (5 marks)

(b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why

the other method is not usually in accordance with generally accepted accounting principles.

(2 marks)