Bad Debt
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Because of calamitous earthquake losses, Kipmo Company, one of your client's oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client's total sales have been made to Kipmo's during each of the past several years. The amount due from Kipmo-- none of which is collectible -- equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Kipmo receivable if it is using the allowance of method of accounting for bad debts? Justify the treatment.
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A- Allowance Method--the allowance method recognizes bad debt expense on the basis of percentage of Accounts Receivables or percentage of Net sales in the period in which credit sales are made.
I in Percentage-of-sales Method the estimated loss is calculated by applying the specific percentage of Net sales. Unlike the Percentage-of-receivables Method previous balance in Allowance account (Debit or Credit) is not considered while calculating estimated bad debt expense for each year.
II) Percentage-of-receivables Method--the amount of the estimated loss is calculated as a percentage of ...
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