Review 7-9 - Chapter 7 Trade discounts Trade discounts...

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Chapter 7 Trade discounts Trade discounts represent reductions from the list or catalog prices of merchandise. They are often used to avoid frequent changes in catalogs or to quote different prices for different quantities purchased. Cash or sales discount 2/10, n/30 Gross method and net method Method to record or estimate uncollectible Account receivables: Direct method (not GAAP) Allowance method: Record estimated uncollectible amount: Bad debt expense xx Allowance for bad debt xx Write off the specific A/R: Allowance for bad debt xx A/R xx Note: Collection of write-off A/R Estimation of Bad Debts Percentage of sales (Income statement approach): Sale * % = Bad debt expense Percentage of account receivable (Balance Sheet approach) Ending A/R * % = Ending Allowance Notes Receivables Effective interest method (Discount on Note Receivables) Disposition of receivables Secured borrowing (assigning or pledging) Sales of receivables (with recourse or without recourse) Assigning (secured borrowing) - use AR as collateral for loan Do not take AR off books of the selling company Factoring (Sale of AR) - company sells AR to another company (factor) Take AR off books of the selling company without recourse with recourse
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Journal Entries for Factoring without Recourse JE for company selling AR Cash xxx Loss on Sale of Receivables xxx Due from factor xxx Accounts Receivable xxx JE for factor (company buying AR ) Accounts Receivable xxx Financing revenue xxx Due to seller xxx Cash xxx Journal Entries for Factoring with Recourse JE for company selling AR
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Review 7-9 - Chapter 7 Trade discounts Trade discounts...

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