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Unformatted text preview: The only item that requires adjustment is the treatment of uncollectible accounts. Rocks estimates that 3% of sales ultimately prove to be uncollectible -- 1% in the year following a sale, and 2% in the year thereafter. (a) Prepare the journal entries that were used by Rocks for each year under the direct write-off method. (b) Determine if the actual write-offs are aligning with the estimates provided by Rocks. Why does GAAP require an allowance method for uncollectibles? (c) Prepare the journal entries that would have been made each year, had the percentage of sales technique been used to establish an allowance account. Be sure to include entries to both establish the allowance, and to record the write offs. (d) How much is the corrected net income for each year? Will the reduction in income potentially impact the amount of capital that can be raised?...
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- Spring '11