Georgia Company reported accountsreceivable of $16.5 million at the end of its20

Question

Georgia Company reported accountsreceivable of $16.5 million at the end of its2007

fiscal year. This amount was net of anallowance for doubtful accounts of $1,800,000.During

2008, Georgia sold $56.5 million ofmerchandise on credit. It collected $57.9 millionfrom

customers. Accounts valued at $1,980,000were written off as uncollectible during2008.

Georgia’s management estimates that10% of the year-end Accounts Receivable balance willbe

uncollectible.

RequiredAnswer each of the followingquestions:

A. What amount will Georgia report foraccounts receivable and the allowance fordoubtful

accounts at the end of2008?

B. What is the Doubtful Accounts Expensefor 2008?

C. How will the accounts receivable andallowance accounts be presented on thebalance

sheet? Show the balancesheet.

D. Why do companies record expenses fordoubtful accounts based on estimatesfrom

receivables or sales during the prior yearrather than recording the expenses when

accounts are written off in a futureperiod?

E. If estimated uncollectibles as apercentage of sales or receivables were to increaseover

several years, what information might thisprovide to decision makers?

Explanation / Answer

                                                    AccountsReceivables                   Allowance for bad debts

B. What is the Doubtful Accounts Expense for2008?             $339,200

D. Why do companies record expenses fordoubtful accounts based on estimates from receivable or salesduring the prior year rather than recording the expense whenaccounts are written off in a future period?

The allowance method of accounting for bad debts matches theexpected loss from uncollectible accounts receivables against thesales they helped produce. Expected lossesmust be used because management can not identify the customers whowill not pay their bills at the time of sale. At the end ofeach period the allowance method requires management to estimatethe total bad debts expected to result from that period’ssales. An allowance is then recorded for this expectedloss.

As such, Bad debts expense is charged to the period when therelated sales are recognized. It is reported on the currentperiod income statement as an administrative expense andaccounts receivable are reported on the balance sheet at theestimated amount of cash to be collected

E. If estimated uncollectible as a percentageof sales or receivable were to increase over several years, whatinformation might this provide to decision makers?

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.