Art World Industries, Inc., was incorporated in 1986 in Delaware, although it is located in Los Angeles. The company prints, publishes, and sells limited-edition graphics and reproductive prints in the wholesale market.
The company's balance sheet at the end of a recent year showed an allowance for doubtful accounts of $175,477. The allowance was set up against certain Japanese accounts receivable that average more than one year in age. The Japanese acknowledge the amount due, but with the slow economy in Japan, they lack the resources to pay at this time.
Instructions:
(a) Which method of accounting for uncollectible accounts does Art World Industries use?
(b) Explain the difference between the direct write-off and percentage of receivables methods. Based on Art World's disclosure above, what important factor would you have to consider in arriving at appropriate percentages to apply for the percentage of receivables method?
(c) What are the implications for a company's receivables management of selling its products internationally?