writing off specific accounts does not change the

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Unformatted text preview: ollected. - Writing off specific accounts does NOT change the net realizable value of accounts receivable. Assume... Accts receivable, gross Less: Allowance for bad debt Accts receivable, net Before writeoff After writeoff 10,000 300 9,700 = 9,900 200 9,700 Allowance method • Journal entries associated with the allowance method: - Recording the period’s estimate of uncollectible accounts. Writing off specific accounts when they go bad. ✓ Assume Customer A goes bankrupt and management decides Customer A’s accounts receivable balance of $100 will never be collected. - Collecting a previously written off account. ✓ Assume management was wrong and two months later customer A finds a way to pay his bill. Balance Sheet (in thousands) December 31, 2011 2010 ASSETS Current assets $175,384 $203,870 Accounts receivable, net 134,043 102,034 Inventories 324,409 215,355 Cash and cash equivalents 55,827 Total current assets 34,591 689,663 Prepaid expenses and other current assets 555,850 Accounts Receivable The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in accounts receivable. The Company reviews the allowance for doubtful accounts monthly. Receivable balances are written off against the allowance when management believes it is probable the receivable will not be recovered. Notes Receivable • A note receivable is a formal contract evidenced by a written note that spells out the terms of the contract. - Example from a previous class: Accrued revenue example (from bank’s perspective) From class 4 A firm borrows $5,000 on January 1. The annual interest rate on the loan is 12%. The loan is due on December 31. Interest expense is recorded monthly but paid semi-annually. Record the 1/1 and 1/31 journal entries REMINDER I did not assign the appendix to Chapter 5...it will NOT be on the exam. FOR YOUR INFO... I will not ask any questions on Exam 1 pertaining to the ratios at the end of Chapter 5....
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