Ch_06

Ch_06 - CHAPTER 6 RECEIVABLES AND REVENUE RECOGNITION...

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6-1 Solutions CHAPTER 6 RECEIVABLES AND REVENUE RECOGNITION Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 6.1 See the text or the glossary at the end of the book. 6.2 The allowance method, because it reports bad debt expense during the period of the sale, not during the later period(s) when specific accounts become uncollectible. 6.3 The direct write-off method matches the loss from an uncollectible account with revenue of the period when a particular account becomes uncollectible. The allowance method matches the loss from an uncollectible account with revenue of the period of the sale instead of the later period when a particular account becomes uncollectible. 6. 4a .A firm with stable sales (both volume and price) and a constant proportion of uncollectible accounts will likely report similar amounts for bad debt expense each period. b. The direct write-off method should always result in larger amounts for accounts receivable-net on the balance sheet than the allowance method. 6. 5a . This statement is valid. Most businesses ought not to set credit policies so stringent that they have no uncollectible accounts. To do so would require extremely careful screening of customers, which is costly, and the probable loss of many customers who will take their business elsewhere. So long as the revenues collected from credit sales exceed the sum of both selling costs and the cost of goods sold on credit, then the firm should not be concerned if some percentage of its accounts receivable are uncollectible. b. If a business liberalizes its credit policy by granting to a group of customers, who were not previously granted this privilege, the right to buy on account, it can find that its net revenues from the new credit customers exceed the cost of goods sold to them and the selling expenses of executing the sales. The extension of credit to new customers can increase net income even though it results in more uncollectible accounts.
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Solutions 6-2 6.5 continued c. When the net present value of the receipts from selling to new customers is larger than the net present value of the costs of putting goods into their hands. 6.6 If a firm computes the Bad Debt Expense figure at the end of the accounting period but writes off specific accounts receivable during the period as information about uncollectible accounts becomes available, then the Allowance for Uncollectibles will have a debit balance whenever the amount of accounts written off during the period exceeds the opening credit balance in the Allowance account. Firms prepare balance sheets only after making adjusting entries. Both the Bad Debt Expense and the Allowance for Uncollectibles accounts must be made current with appropriate adjusting entries before preparing the balance sheet. Because the Allowance for Uncollectibles account is an asset contra, it will always show a credit (or perhaps a zero) balance after making adjusting entries.
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This note was uploaded on 04/23/2010 for the course B 101 taught by Professor Mcafee during the Winter '10 term at UMBC.

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Ch_06 - CHAPTER 6 RECEIVABLES AND REVENUE RECOGNITION...

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