Detailed Answer
(a) The aging of receivables method of estimating uncollectible
accounts is based on the theory that bad debts are a
function of accounts receivable collections during the period.
The aging of receivables method emphasizes reporting accounts
receivable at their net realizable value. It is a “balance-sheet”
approach, which stresses the collectibility (valuation) of the receivable
balance. Once the balance of the allowance account
required to reduce net accounts receivable to their realizable
value has been computed, bad debts expense is merely the
amount needed to adjust the allowance account to the computed
balance. Answer (b) is incorrect because under the direct writeoff
method, bad debts are considered expenses in the period in
which they are written off; no consideration is given to the valuation
of accounts receivable. Answers (c) and (d) are incorrect
because both of these methods are based on the theory that bad
debts are a function of sales. Thus, these methods emphasize
reporting the bad debts expense amount accurately on the income
statement.