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Chapter 7: 11Q (page 362)
Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting鈥檚 measurement function.
In comparison to the allowance method, the direct write-off method proves to be more objectivebut it is also not fully objective.
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What may be included under the heading of 鈥渃ash鈥�?
Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books.
(a) Deposit in transit \(5,500. | (d) Outstanding checks \)7,422. |
(b) Bank service charges \(25. | (e) NSF check returned \)377. |
(c) Interest credited to Horton鈥檚 account $31. |
(Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.
Instructions
(a) In a recessionary environment with tight credit and high interest rates:
(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.
(2) Then evaluate each step identified in terms of the risks and costs involved.
(b) Should the controller be concerned with Marvin Company鈥檚 growth rate in estimating the allowance? Explain your answer.
(c) Does the president鈥檚 request pose an ethical dilemma for the controller? Give your reasons.
Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow鈥檚 Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.
Days Account Outstanding | Amount | Probability of Collection |
Less than 16 days | $300,000 | .98 |
Between 16 and 30 days | 100,000 | .90 |
Between 31 and 45 days | 80,000 | .85 |
Between 46 and 60 days | 40,000 | .80 |
Between 61 and 75 days | 20,000 | .55 |
Over 75 days | 15,000 | .00 |
Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
(b) Show how accounts receivable would be presented on the balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?
(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.
Debit | Credit | |
Accounts receivables | \(100,000 | |
Allowance for doubtful accounts | \)2,000 | |
Sales revenue (All on credit) | 900,000 | |
Sales return and allowance | 50,000 |
Instructions
Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.
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