Page 400 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

➢ In view of the fact that it is impossible to estimate the exact amount of uncollectible accounts
receivable for any one year in advance, what exactly does the Allowance for Uncollectible Accounts
account contain after a number of years?

➢ What must be considered before adjusting the allowance for uncollectible accounts under the
percentage-of-receivables method?
➢ How might information in an aging schedule prove useful to management for purposes other than
estimating the size of the required allowance for uncollectible accounts?

➢ For a company using the allowance method of accounting for uncollectible accounts, which of the
following directly affects its reported net income: (1) the establishment of the allowance, (2) the

writing off of a specific account, or (3) the recovery of an account previously written off as
uncollectible?
➢ Why might a retailer agree to sell by credit card when such a substantial discount is taken by the
credit card agency in paying the retailer?
➢ Define liabilities, current liabilities, and long-term liabilities.
➢ What is an operating cycle? Which type of company is likely to have the shortest operating cycle, and
which is likely to have the longest operating cycle? Why?

➢ Describe the differences between clearly determinable, estimated, and contingent liabilities. Give one
or more examples of each type.

➢ In what instances might a company acquire notes receivable?
➢ How is the maturity value of a note calculated?
➢ What is a dishonored note receivable and how is it reported in the balance sheet?
➢ Under what circumstances does the account Discount on Notes Payable arise? How is it reported in
the financial statements? Explain why.

➢ Real world question Refer to "A Broader Perspective: GECS allowance for losses on financing
receivables". What factors are taken into account by the General Electric Company in determining
the adjusting entry to establish the desired balance in the Allowance for Losses?
➢ Real world question Refer to "A Broader Perspective: GECS allowance for losses on financing
receivables". Explain how the General Electric Company writes off uncollectibles.
Exercises
Exercise A The accounts of Stackhouse Company as of 2010 December 31, show Accounts Receivable, USD
190,000; Allowance for Uncollectible Accounts, USD 950 (credit balance); Sales, USD 920,000; and Sales Returns

and Allowances, USD 12,000. Prepare journal entries to adjust for possible uncollectible accounts under each of the
following assumptions:
a. Uncollectible accounts are estimated at 1 per cent of net sales.
b. The allowance is to be increased to 3 per cent of accounts receivable.
Exercise B Compute the required balance of the Allowance for Uncollectible Accounts for the following
receivables:

Accounts Age Probability
Receivable (months) of Collection
$180,000 Less than 1 95%
90,000 1-3 85

Accounting Principles: A Business Perspective 401 A Global Text