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Allowance for Doubtful Debts for Holland Company (Hermesch Company)

P1-2A Information related to Holland Company for 2002 is summarized below.

Total credit sales $2,100,000
Accounts receivable at December 31 840,000
Accounts receivable written off 38,000

Instructions
(a) What amount of bad debts expense will Holland Company report if it uses the direct write-off method of accounting for bad debts?
(b) Assume that Holland Company estimates its bad debts expense to be 3% of credit sales. What amount of bad debts expense will Holland record if it has an Allowance for Doubtful Accounts credit balance of $4,000?
(c) Assume that Holland Company estimates its bad debts expense based on 6% of accounts receivable. What amount of bad debts expense will Holland record if it has an Allowance for Doubtful Accounts credit balance of $3,000?
(d) Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Holland record?
(e) What is the weakness of the direct write-off method of reporting bad debts expense?

Solution Preview

(a) What amount of bad debts expense will Holland Company report if it uses the direct write-off method of accounting for bad debts?

Under the direct write-off method the bad debt expense is equla to the debts written off. Here the debts written off are 38,000. The bad debt expense reported would be 38,000.

(b) Assume that Holland Company estimates its bad debts expense to be 3% of credit sales. What amount of bad debts expense will Holland record if it has an Allowance for Doubtful Accounts credit balance of $4,000?

The credit sales are 2,100,000. 3% of ...

Solution Summary

The solution explains the calculation of bad debt expense under the percentage of receivables method and the percentage of sales method. This solution is 255 words.

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