Questions -
1. What are the essential features of the allowance method of accounting for bad debts?
2. 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.
Determine bad debt expense, and prepare the adjusting entry.
3. 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 on page 402.
1. Age of Accounts
Estimated Percentage Uncollectible
Current 2%
1-30 days past due 7
31-90 days past due 30
Over 90 days 50
2. 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.
4. 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.
Explain why Food Lion must write down the current carrying value of its unprofitable stores.
Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.