Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers, On April 1, 2011, the comany factored, without recourse, some of its accounts receivable. Magrath transferred the receivables to a financial institution, and will have no further accociation with the receivables.
Magrath uses the allowance method to account for unclooectible accounts. During 2011, some accounts were written off as uncollectible and other accounts previously written off as uncollectible were collected.
1. How should Magrath account for and report the accounts receivable factored on April 1, 2011? Why is this accounting treatment apprpriate?
2. How should Magrath account for the collection of the accounts previously written off as uncollectible?
3. What are the two basic approaches to estimating uncollectible account under the allowance method? What is the rational for each approach?
1) The company will debit cash for the amount received from the factoring of the receivables, credit AR for the total dollar of receivables factored, and then debit factoring expenses (or service fees) for the difference between the two amounts. This accounting treatment is appropriate because it writes off the value of the AR
2) The company ...