Question

On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only $5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.2. What are some limitations that Best Performance will encounter when using the direct write-off method?

Answer 1

Answer:

2) the limitations of direct write off method are  that the bad debts amount owed is directly reported as a loss . It is not treated as an expense.

Explanation:

Best Performance Cell

Journal Entries

Date                Particulars                 Debit            Credit

1 June      Account Receivable (Anthony Trucking Co.) $ 21000 Dr

                      Sales                            $21000 Cr

On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony Trucking Company on account

15 July                  Cash                    $ 5000 Dr

                Account Receivable (Anthony Trucking Co.) $ 5000 Cr

On July 15 received only $5,000 of the account receivable.

5 Sept             Bad debts Expense          $ 16000 Dr

                          Account Receivable (Anthony Trucking Co.) $ 16000 Cr

Best Performance finally wrote off its accounts receivable from Anthony on September 5.

5 March             Account Receivable (Anthony Trucking Co.)  $ 16000Dr

                                  Bad Debts Account                      $ 16000 Cr

                           Cash                         $ 16000 Dr

                    Account Receivable (Anthony Trucking Co.)  $ 16000 Cr

Companies must weigh at least two accounting principles when considering the use of direct method.

1) matching principle

2) materiality principle

The matching principle requires that the expenses  be reported in the same accounting period as the sales they helped produce. This means that the bad debts must be reported in the period of the credit sales.

The materiality principle states that the amount can be ignored if it is very small in relation to a company's other financial statements such as sales and net income.