Determine the amount of bad debts the business will record

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Reference no: EM133000138

The following information relates to Somerville Ltd at 30 June 2012:

Total credit sales $2,000,000

Accounts Receivable 460,000

Required:

Consider each of the following questions separately.

Problem a) Assume one of Somerville's customers is unable to pay the $29,000 owing on their account. State the amount of bad debts expense Somerville Ltd will record if it uses the direct write off method of accounting for bad debts.

Problem b) Assume that Somerville Ltd decides to estimate its bad debts expense based on 5% of accounts receivable. Determine the amount of bad debts the business will record if there is a debit balance of $11,500 in the Allowance for Doubtful Debts account at 30 June 2012.

Problem c) Briefly discuss the weakness of using the direct write-off method of accounting for bad debts expense. Explain the rationale for using the direct write off method as the chosen method for accounting for bad debts.

Reference no: EM133000138

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