Georgia Company reported accounts receivable of $ 16.5 millionat the end of its

Question

Georgia Company reported accounts receivable of $ 16.5 millionat the end of its 2007 fiscal year. This amount was net of anallowance for doubtful accounts of $ 1,800,000. During 2008,Georgia sold $ 56.5 million of merchandise on credit. It collected$ 57.9 million from customers. Accounts valued at $ 1,980,000 werewritten off as uncollectible during 2008. Georgia’smanagement estimates that 10% of the year- end Accounts Receivablebalance will be uncollectible.

Answer each of the following questions:

A.     What amount will Georgia report foraccounts receivable and the allowance for doubtful accounts at theend of 2008?

B.     What is the Doubtful Accounts Expensefor 2008?

C.     How will the accounts receivable andallowance accounts be presented on the balance sheet? Show thebalance sheet.

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

E.      If estimated uncollectibles as apercentage of sales or receivables were to increase over severalyears, what information might this provide to decision makers?

Explanation / Answer

A Amount Georgia Will report for AccountsReceivable at the end of 2008 Credit Sales made by G 56.50 Amount Collected for 2008 Sales 41.40 ( 57.9 - 16.5 ) Accounts Receivable for 2008 15.10 Less: Amounts Written off 1.98 Accounts Receivable for 2008 13.12 Less: Estimated Uncollectibles 1.32 Net Accounts Receivable 11.80 B Doubtful Debt Expense for 2008 1.32 C. Allowance forDoubtful Debts Accounts Receivable 1.98 Opening Balance 1.8 Closing Balance 1.14 Bad Debt Expense 1.32 3.12 3.12    Balance Sheet Accounts Receivable for 2008 3.12 Less: Estimated Uncollectibles 1.32 Net Accounts Receivable 1.8 D This is the doctorine ofconservatism. The whole of Accounts Receivable might not be Collectible. Hence , based on the past experience , a certain amount is assumed as uncollectible. E This practice will tell the decision makers that the company is following liberal Credit policies.

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