1. King Co. estimates bad debts expense to be 1% of net credit sales. At the end of 2013, Kings gross accounts receivable was $187,000, and its allowance for doubtful accounts was 6,850. During 2014, King wrote off $21,350 as bad debts, and recorded net credit sales of $2,400,000. At the end of 2014, Kings gross accounts receivable was $210,000. Compute the net realizable value of accounts receivable at the end of 2014.

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2. When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method.

Instructions

1. (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense.
2. (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.