Malagash Ltd. (Malagash) recently learned that a major customer would be permanently shutting down its operations within 30 days. The reason for the shut-down isn’t clear but Malagash’s management assumes there are financial problems underlying the decision. As of Malagash’s year-end it isn’t clear whether it will receive any of the \($50,000\) owed to it by the customer. Despite the uncertainty regarding collection, Malagash’s management decided it would write off the \($50,000\) receivable in the current fiscal year.

a. Prepare the journal entry that Malagash would prepare if it were using the direct writeoff method of accounting for uncollectible amounts. What would be the effect on net income of the entry?

b. Prepare the journal entry that Malagash would prepare if it were using the percentageof-
credit-sales method of accounting for uncollectible amounts. What would be the effect on net income of the entry?

c. Prepare the journal entry that Malagash would prepare if it were using the percentageof-
receivables method of accounting for uncollectible amounts. What would be the effect on net income of the entry?

d. Why do you think that Malagash decided to write off the receivable in the current fiscal year, even though it didn’t know whether it would be paid or not? In answering consider accounting principles and the objectives of accounting.