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Achievesapropermatchingofcostandrevenues percentage

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Unformatted text preview: ounts Receivable Uncollectible Accounts Receivable E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 5% of accounts receivable (A bit tougher because we are calculating Allowance “balance” now.) Bad Debt Expense Allowance for Doubtful Accounts 6,000 6,000 ($160,000 x 5%) – $2,000) = $6,000 Chapter 7-36 LO 5 Uncollectible Accounts Receivable Uncollectible Accounts Receivable Summary Percentage of Sales approach: Bad debt expense estimate is related to a nominal (or temporary) account (Sales) so balance in the Allowance account is ignored. Achieves a proper matching of cost and revenues. Percentage of A/R approach (my favorite): Bad debt expense estimate is related to a real (or permanent) account (A/R) so balance in the Allowance account matters. Does NOT achieve “perfect” matching, but better than Direct. Results in more accurate valuation of receivables on B/S (NRV). May be applied using an A/R aging schedule (even more accurate). Chapter 7-37 LO 5 Explain accounting issues related to valuation of accounts receivable. Notes Receivable Notes Receivable Characteristics Supported by a formal promissory note A negotiable ins...
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