Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 5.5AP
Compare the direct write-off method to the allowance method (LO5–3, 5–6)
In an effort to boost sales in the current year, Roy’s Gym has implemented a new program where members do not have to pay for their annual membership until the end of the year. The program seems to have substantially increased membership and revenues. Below are year-end amounts.
| Membership Revenues | Accounts Receivable | |
| Last year | $ 150,000 | $ 6,000 |
| Current year | 450,000 | 170,000 |
Arnold, the owner, realizes that many members have not paid their annual membership fees by the end of the war. However, Arnold believes that no allowance for uncollectible accounts should be reported in the current war because none of the nonpaying members’ accounts have proven uncollectible. Arnold wants to use the direct write-off method to record
Required:
1. Do you agree with Arnold’s reasoning for not reporting any allowance for future uncollectible accounts? Explain.
2. Suppose that similar programs in the past have resulted in uncollectible accounts of approximately 70%. If Arnold uses the allowance method, what should be the balance of Allowance for Uncollectible Accounts at the end of the current war?
3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current war if Arnold uses the direct write-off method? Ignore tax effects.
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Chapter 5 Solutions
Financial Accounting
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