Financial Accounting questions: "Financial Accounting: Tools for Business Decision Making"
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o Prepare responses to the following assignment from the e-text, Financial Accounting: Tools for Business Decision Making 4th ed., by Kimmel, Weygandt, and Kieso
o Chapter 8: Questions 3 and 4
o Chapter 8: Exercise E8-5
3. What are the essential features of the allowance method of accounting for bad debts?
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.
E8-5 Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis
of the accounts shows these amounts.
Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Allowance
for Doubtful Accounts prior to adjustment. The company uses the percentage of
receivables basis for estimating uncollectible accounts. The company's estimates of bad
debts are as shown below.
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1-30 days past due 7
31-90 days past due 30
Over 90 days 50
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.
o Chapter 9: Exercise E9.9
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 below).
Asset dispositions occur frequently in many businesses, and the gains and losses that result
often are material in amount. For instance, recent financial statements of U.S. Steel
and Dow Chemical reported gains on asset dispositions of $40 million and $24 million, respectively.
The income statements of Consolidated Freightlines and Ford Motor Company,
on the other hand, reported losses on asset dispositions of $4 million and $235
million, respectively.
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.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered
a noncash expense.
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Solution Summary
The solution examines the tools for business decision making for financial accounting.
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• Prepare responses to the following assignment from the e-text, Financial Accounting: Tools for Business Decision Making 4th ed., by Kimmel, Weygandt, and Kieso
o Chapter 8: Questions 3 and 4
o Chapter 8: Exercise E8-5
3. What are the essential features of the allowance method of accounting for bad debts?
The sale of goods and services in the course of business on credit gives rise to Accounts receivable. The business is not certain of collecting all accounts receivables. There are two methods of accounting for uncollectible accounts when it becomes highly probable that some accounts will not be collected. The methods are the allowance method and the direct write-off method.
The most essential feature is to make a reasonable estimate of the dollar amount to be written-off. This generally takes the form of percentage of credit sales or percentage of accounts receivable and is based on past data and experience and future business activity. Under this method an estimate of uncollectible accounts is made and expensed against revenue in the same period in which the revenue is generated. The expense is debited with corresponding effect to Allowance for Doubtful accounts. The allowance for uncollectible accounts is deducted from the accounts receivable balance in the balance sheet to reflect the expected cash collections from accounts receivables.
4. Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible ...
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