# ps3_sol - We can infer this because the ending allowance...

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Problem Set #3 15.501/516: Financial and Managerial Accounting Solutions 1. a. Bad debt expense would be: .04 * \$870,000 = \$34,800. Gross A/R is calculated using the analyst’s report: 400,000+90.000+40,000+20,000 = 550,000 The ending book value of accounts receivable would be \$550,000 - (25,200 -30,000 + 34,800) = \$520,000. b. The aging approach first determines the desired ending balance of the allowance as (.005 * 400,000) + (.01 * 90,000) + (.1 * 40,000) + (.7 * 20,000) = \$20,900 The Bad debt expense has to be: 25,200 - 30,000 + x = 20,900 ==> x = \$20,900 - 25,200 + 30,000 = \$25,700. Ending BV of A/R = \$550,000 - 20,900 = \$529,100 c. If the aging analysis gives a fair estimate of the outstanding accounts that won't be collected, then it appears that Dove Company has been overestimating bad debt expense via the percent of sales method.
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Unformatted text preview: We can infer this because the ending allowance balance in part a. above (30,000) is much greater than the desired balance derived in part ( b ) . The lower amount of bad debt expense computed in part ( b ) is compensating for overly aggressive estimates in the past. 2. a. Cash (A) increases by \$240, and Deferred Membership Revenue (L) increases by \$240. b. Since the \$240 is membership revenue for a year, and 2 months pass between 12/1/99 and 1/29/2000, the company may now recognize 1/6 of the deferred revenue or \$40. In terms of the BSE, Deferred Membership Revenue (L) decreases by \$40, and Retained Earnings (SE) increases by \$40, through the recognition of sales revenue....
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## This note was uploaded on 01/16/2012 for the course ACCOUNTING 15.501 / 1 taught by Professor Sugataroychowdhury during the Spring '04 term at MIT.

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