I. James Co. uses the direct write-off method to account for bad debts. (a) What
ID: 2562924 • Letter: I
Question
I. James Co. uses the direct write-off method to account for bad debts. (a) What entry would be made to record a write off of an account receivable balance of $6,500? (b) As opposed to the allowance method of recording bad debts, why is the direct write-off method against U.S. generally accepted accounting principles (GAAP)?
II. JamesCompany acquired 35% of the voting common stock of XYZ, Inc. on January 1, 20X4 for $400,000. For the year ended December 31, 20X4, XYZ, Inc.’s audited financial statements reported a net income of $80,000. Also, XYZ, Inc. declared and paid total dividends to its shareholders of $40,000 on December 31, 20X4. The fair value of the shares purchased by James Company was $450,000 on December 31, 20X4. How should James Company account for its investment in XYZ, Inc.?
III. On April 1, 20X6, ABC Co. purchased factory equipment with a list price of $56,000. ABC Co. received a 5% discount off the list price. ABC Co. paid the seller $23,200 down and signed a three-month note payable for the $30,000 principal balance due on June 30, 20X6. The note payable agreement also requires that ABC Co. pay the seller interest of $75 per month (3% annual rate) at the end of each of the next three months beginning April 30, 20X6. Additionally, ABC Co. paid sales tax on the purchase of $1,600 and equipment delivery and installation costs of $1,700. The equipment was damaged when it was unloaded resulting in repair costs to ABC Co. of an additional $800.
What is the total equipment cost that will be recorded by ABC. Co.?
a. $56,000. b. $53,200. c. $54,800. d. $56,500.
Explanation / Answer
1.
A. Journal entry to write off bad debt under direct write off method:
B.
Direct write off method is against U.S. GAPP because it violates the matching principal , which says that expenses must be matched with revenue. It takes a long time to recognize a debt as bad debt so the write off occurs in a different year than the revenue was recorded. In this way direct write off violates the U.S. GAPP.
Bad debt expense $6,500 Account receivable $6,500