Chapter 7: Question 7 (page 362)
Discuss the accounting for sales allowances and how they relate to the concept of variable consideration.
It is reported as a contra-revenue account, adjusted against accounts receivable and sales revenue.
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(Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2017.
1. An aging schedule of the accounts receivable as of December 31, 2017, is as follows.
Age | Net Debit Balance | % to be applied after correction is made |
Under 60-days | \(172,342 | 1% |
60-90 days | 136,490 | 3% |
91-120 days | 39,924 | 6% |
Over 120 days | 23,644 | \)3,700 definitely uncollectible; estimated remainder uncollectible is 25% |
\(372,400 |
*The \)3,240 write-off of receivables is related to the 91-to-120 day category.
2. The Accounts Receivable control account has a debit balance of \(372,400 on December 31, 2017.
3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for \)3,240 on November 3, 2017, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.
4. Allowance for Doubtful Accounts is as follows for 2017.
Allowance for Doubtful Accounts | |||||
Nov 3 | Uncollectible accounts written off | 3,240 | Jan 1 | Beginning balance | 8,750 |
Dec 31 | 5% of \(372,400 | 18,620 |
5. A credit balance exists in Accounts Receivable (60–90 days) of \)4,840, which represents an advance on a sales contract.
Instructions
Assuming that the books have not been closed for 2017, make the necessary correcting entries.
Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
(Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.
Instructions
(a) In a recessionary environment with tight credit and high interest rates:
(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.
(2) Then evaluate each step identified in terms of the risks and costs involved.
(b) Should the controller be concerned with Marvin Company’s growth rate in estimating the allowance? Explain your answer.
(c) Does the president’s request pose an ethical dilemma for the controller? Give your reasons.
Dold Acrobats lent \(16,529 to Donaldson, Inc., accepting Donaldson’s 2-year, \)20,000, zero-interest-bearing note. The implied interest rate is 10%. Prepare Dold’s journal entries for the initial transaction, recognition of interest each year, and the collection of $20,000 at maturity.
Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.
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