PA14_GROUP 3_GROUP ASSIGNMENT

PART A
1) In recording journal entries for Equipment A:
a. Record its purchase on January 1, 2022:

b. Record annual depreciation at December 31, 2022, assuming the

straight-line method of depreciation is used:

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2) Determine annual depreciation expense for Equipment B each year of its useful
life under the following assumption.

a. Shella Co. uses the straight-line method of depreciation:

b. Shella Co. uses the declining-balance method. The estimated rate used is
50%:

c. Shella Co. uses the units-of-activity method and estimates the useful life of
the machine is 25,000 units. Actual usage is as follows: 2022, 5,500 units;
2023, 7,000 units; 2024, 8,000 units; 2025, 4,500 units:

d. Which method used to calculate depreciation on Equipment B reports the

lowest amount of depreciation expense in year 1 (2022)? The lowest
amount in year 4 (2025)? The lowest total amount over the 4-year period?
Provide relevant explanation:

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 - The lowest amount of depreciation expense in year 1 (2022) = Units-of-Activity
$24,200, because unit of activity is only 5500 units which is LOWER than the
average of total units during 4 years (total of units / useful life = the average =>
25000/4=6250)

- The lowest amount of depreciation expense in year 4 (2025) = Declining-Balance

$5,000 because this method accelerates LARGER depreciation expense during the
earlier years (2022 and 2023) of a four year useful life compared to the two other
methods.

- According to the textbook, annual depreciation varies considerably among the

methods, but total depreciation expense is the same ($110,000) for the four years
under all three methods, because the scrap value (=end book value) at the end of year
4 is $10,000. Therefore, there is not any lowest total depreciation expense in the
four-year period.

PART B
We disagree with his opinion because of the following reasons:
a) The business decided to write off an amount owed from PSO Consulting as a bad
debt => The business uses the DIRECT WRITE-OFF METHOD

b) When the customer PSO Consulting pays money, the accountant shouldn’t make only
one transaction to record the payment (although his final transaction is correct in the
Direct Write-off method). Although his way is easy, it does not explain how this
transaction is recorded and may cause confusion.

- Instead, he should record two transactions:

+ The full transaction entry will look like this:
1) To reverse the write-off :

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 2) To record the collection:

- Therefore, the final entry is:

➔ Conclusion: If he used the Direct Write-off method, he would have to record the full
transaction above although his final entry is correct.

- However, JB Hi-fi should not use Direct write-off methods because of the following
reasons:
+ Use of the direct write-off method can reduce the relevance of both the income
statement and the balance sheet. It does not match bad debt expense to sales
revenue in the income statement.
➔ The beginning balance sheet and income statement looked great.
➔ However, when the customers can not pay the debt, the income
statement and balance sheet afterwards look terrible.
- Moreover, he does not show Account Receivable in the balance sheet at the amount
that the company expects to receive in cash.
- The direct write-off method is not acceptable for financial reporting purpose (GAAP)

c) We also disagree with the opinion “He did not want to use the other methods due to
the complication in the process of recovering the bad debts amount.”

- There are 2 methods for uncollectible accounts: Direct write-off method and
allowance methods. The accountant in this case uses the Direct write-off method
which has some disadvantages that have been discussed above.

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 - Alternatively, he should use the allowance method for the following reasons:
+ It better matches expenses with revenues on the income statement.
+ It also ensures that companies state receivables on the balance sheet at their
cash (net) realizable value.
- The recovery of an uncollectible account may affect only balance sheet accounts

➔ We suggest he should use Allowance Method for Uncollectible Amounts:

+ Step 1: Estimate Uncollectible Amount

+ Step 2: Write-off of an Uncollectible Amount

+ And he should record the recovery of a previously written off customer

account with two entries:

In conclusion,
- If the accountant uses the Direct Write-off method, he should record in 2 full
transactions rather than the final one he makes.
- However, the direct Write-off method is not suggested to be used in business.
- The accountant should use the Allowance method.