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Columbia Business School | Accounting I: Financial Accounting (B6001) 2 Answer to Question 2. (Hook The Crook) a.Expected defaults on receivables are recognized at the time of sale in accordance with the matching principle. As part of a credit sale, the company assumes the risk of the customer’s potential future inability to pay. The possibility of not collecting an outstanding balance gives rise to a cost that is effectively incurred as part of the sales transaction and hence should be recognized at the same time, even though the amount is still uncertain and must be estimated. b.Given the aging table, the ending balance of the allowance for doubtful accounts must be 4000000 × 0.05 + 3500000 × 0.1 + 3000000 × 0.25 + 2500000 × 0.5 = 2550000 The 2017 bad debt expense must therefore be such that allowance (12/31/2016) + bad debt expense (2017) – write-offs (2017) = allowance (12/31/2017) which, after inserting the numerical values, yields 100000 + bad debt expense (2017) – 600000 = 2550000and so bad debt expense in 2017 must be $3,050,000. The journal entry is: DR bad debt expense 3,050,000 CR allowance for doubtful accounts 3,050,000 c.Of the total gross receivables of $13,000,000 at the end of 2017, $2,550,000, or 19.6%, are expected to be uncollectible. The net realizable value is therefore 80.4% of gross receivables. At the end of 2016, the company expected defaults of $100,000 on gross receivables of $1,000,000, or 10%, corresponding to a net realizable value of 90% of gross receivables. d.On its 2016 sales, the company incurred a profit of

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