C 6-3

Bad Debt Expense

LO 6.5AICPA Adapted 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, a company must recognize bad debt expense. The two methods of recognizing bad debt expense are the (1) direct write-off method and (2) allowance method.

Required:

1. Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense.

2. Explain the reasons why one of these methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.