Interest revenue is often substantial for many

  • University of Phoenix
  • ACC 291
  • Notes
  • nataliasalaskina
  • 40
  • 90% (10) 9 out of 10 people found this document helpful

This preview shows page 4 - 6 out of 40 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Survey of Accounting
The document you are viewing contains questions related to this textbook.
Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
Interest revenue is often substantial for many retailers. E T H I C S N O T E In exchange for lower interest rates, some companies have eliminated the 25-day grace period before finance charges kick in. Be sure you read the fine print in any credit agreement you sign. Cash Flows no effect A SE L 300 300 Rev Cash Flows no effect A SE L 4.50 4.50 Rev JWCL165_c08_356-395.qxd 7/31/09 3:20 PM Page 359
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Survey of Accounting
The document you are viewing contains questions related to this textbook.
Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
Valuing Accounts Receivable Once companies record receivables in the accounts, the next question is: How should they report receivables in the financial statements? Companies report accounts receivable on the balance sheet as an asset. But determining the amount to report is sometimes difficult because some receivables will become uncollectible. Each customer must satisfy the credit requirements of the seller before the credit sale is approved. Inevitably, though, some accounts receivable become un- collectible. For example, a customer may not be able to pay because of a decline in its sales revenue due to a downturn in the economy. Similarly, individuals may be laid off from their jobs or faced with unexpected hospital bills. Companies record credit losses as debits to Bad Debts Expense (or Uncollectible Accounts Expense). Such losses are a normal and necessary risk of doing business on a credit basis. Two methods are used in accounting for uncollectible accounts: (1) the direct write-off method and (2) the allowance method. The following sections explain these methods. DIRECT WRITE-OFF METHOD FOR UNCOLLECTIBLE ACCOUNTS Under the direct write-off method , when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s $200 balance.The entry is: 360 Chapter 8 Accounting for Receivables Distinguish between the methods and bases companies use to value accounts receivable. S T U D Y O B J E C T I V E 3 Dec. 12 Bad Debts Expense 200 Accounts Receivable—M. E. Doran 200 (To record write-off of M. E. Doran account) Under this method, Bad Debts Expense will show only actual losses from un- collectibles.The company will report accounts receivable at its gross amount. Although this method is simple,its use can reduce the usefulness of both the in- come statement and balance sheet. Consider the following example. Assume that in 2011, Quick Buck Computer Company decided it could increase its revenues by offering computers to college students without requiring any money down and with no credit-approval process. On campuses across the country it distributed one million computers with a selling price of $800 each. This increased Quick Buck’s revenues and receivables by $800 million. The promotion was a huge success! The 2011 balance sheet and income statement looked great. Unfortunately, during 2012, nearly 40% of the customers defaulted on their loans.This made the 2012 in- come statement and balance sheet look terrible. Illustration 8-1 shows the effect of these events on the financial statements if the direct write-off method is used. Cash Flows no effect A SE L 200 Exp 200 Year 2011 Year 2012 Net income Net

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture