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Sears Accounting for uncollectible Accounts

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Companies must consider how accounting standards, within the current accounting framework, can have a variety of economic consequences on the company.

Consider the article "Sears: Accounting for Uncollectible Accounts" (Hoyt & Nelson, 2000). Next, using outside sources that you may seek and your professional experience, develop and write a 3 page paper concisely answering the following questions:

(A2.1) What is Sears' management trying to achieve through decisions with respect to financial reporting for uncollectible accounts?

(A2.2) What accounting standards must Sears consider when making its decisions?

(A2.3) Did Sears management meet its financial reporting objectives?

(A2.4) What did Sears' accountants (and management) use in making decisions: knowledge, estimates, or assumptions? Is there any difference between these things?

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Solution Summary

This posting gives you a step-by-step explanation of presentation of uncollectible Accounts . The response also contains the sources used.

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Step 1

1998, Sears planned a new system in which accounts are charged off automatically when the customer fails to make a required payment in each of the eight billing cycles following a missed period. The purpose of the new system according to Sears is to help Sears better manage its collection efforts by identifying delinquent accounts earlier and enabling better control of uncollectible expenses. From the accounting perspective the balances were charged off earlier than under the previous system.

Step 2

The accounting standard that Sears must consider is the GAAP. According to the GAAP Sears must evaluate its outstanding accounts receivable from time to time and come up with an estimate of how much of the total Sears will not be able to collect. This judgment should be made on the basis of experience. According to GAAP Sears is required to report an expense based on the estimate Sears arrived at when it analyzed its accounts receivable. According to the GAAP an "allowance for uncollectible accounts" has to be created. This is a contra asset; it offsets the balance in another asset account. The amount reported as bad debt expense goes into this allowance. Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 310-10-35-7 through 310-10-35-9 says that losses from uncollectible receivables are accounted for as loss ...

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