Option #1: Nebraska Bookshop Financial Review
Nebraska bookshop specializes in used, rare, and out-of-print books. The store has a large base of repeat customers who purchase books on 30-day accounts. At 15 days overdue, each customer gets a phone call from Nebraska requesting payment. Nebraska has experienced a high success rate with this collection effort. Nebraska’s CPA is preparing year-end financial statements, and the company has asked him for his estimate of uncollectible accounts. Nebraska has a balance of $65,000 in the accounts receivable account at the end of the year. The CPA has analyzed the company’s uncollectible accounts using an aging of the accounts receivable. He estimates that only 2.5% of his accounts receivable balance will not be collected. The allowance for doubtful accounts has a credit balance of $210 in the trial balance.
Complete the following:
- Prepare the journal entry to record the bad debts expense at year end.
- Show the balance sheet presentation of the accounts receivable account.
- Determine and specify the amount of bad debts expense that appears on the income statement. Describe how this amount is classified.
- Describe the justification, if any, for Nebraska to use the direct write-off method for accounting for uncollectible accounts.
- Indicate three or four measures Nebraska can implement to minimize his write-offs and explain why investors would be concerned about write-offs.
Your response should include 2-3 pages of written text in addition to any calculations and solutions you offer to support your thinking.