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The Jones Beauty Supply Co.

Part 1: On July 1, 2005, Jones Beauty Supply, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Jones Beauty Supply will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2006.

Discuss when Jones Beauty Supply should report interest income from the note receivable; be sure to identify your rationale and any alternatives you do not recommend.

Part 2: On December 31, 2004, Jones Beauty Supply had significant amounts of accounts receivable as a results of credit sales to its customers. Jones Beauty Supply uses the allowance method based on credit sales to estimate uncollectible accounts. Past experience indicates that 2% of total credit sales normally will not be collected. There is no evidence to expect this pattern will change.

Discuss the rationale for using the allowance method based on credit sales to estimate uncollectible accounts. Contrast this with the allowance method based on the ending balance of accounts receivable.

Describe how Jones Beauty Supply should report the allowance for uncollectible accounts on its Balance Sheet on December 31, 2004. Describe how Jones Beauty Supply should report the uncollectible account expense on its December 31, 2004 Income Statement and any presentation alternatives.

Solution Preview

Part 1 -

The most important point in this scenario is that they're a calendar year company. The writers of this problem put that in there to see if you'd notice it. Because they are a calendar year company, they have to report interest income at the close of the year, which is 12/31, since they're a calendar year company. On 12/31, they'd accrue six full months' worth of interest. The remaining six months of interest income would be recognized when the note is due, on 06/30, even if the note is paid early. The rationale is that Jones would record the interest revenue in accordance with accrual accounting principles. Based on accrual accounting, interest accrues on an ongoing basis during the life of the note, ...

Solution Summary

Discuss when Jones Beauty Supply should report interest income from the note receivable; be sure to identify your rationale and any alternatives you do not recommend.

Discuss the rationale for using the allowance method based on credit sales to estimate uncollectible accounts. Contrast this with the allowance method based on the ending balance of accounts receivable.

Describe how Jones Beauty Supply should report the allowance for uncollectible accounts on its Balance Sheet on December 31, 2004. Describe how Jones Beauty Supply should report the uncollectible account expense on its December 31, 2004 Income Statement and any presentation alternatives.

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