3. What are the essential features of the allowance method of accounting for bad debts?
The essential features of the allowance method of accounting for bad debts are the one must subtract the amount of money that has not been collected to that of the allowance of doubtful accounts. Once subtracted one must add the “bad debt” to accounts receivable when it has been written off.
4. Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren.
The reason why cash realizable value does not increase is because the cash realizable is counted as adjusted entry. Once counted as adjusted entry the accounts receivable and allowance of doubtful debt is balanced out to zero.
(a) Determine the total estimated uncollectibles.
The total estimated uncollectibles is 2%
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
Accounts Receiveable – Allowance for doubtful accounts =
$92,100 - 2,200 = $89,900
The adjusting entry is $89,900
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.
The implication of the changes in the aging schedule from 2006 to 2007 is that the aging of the accounts for doubtful accounts will continue to grow.
For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company
closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down (see the Case in Point on page 381).
A recent Food Lion income statement reports a $9.5 million charge against income pertaining
to the write-down of impaired assets.
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores....