Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2007, the company factored, without recourse, some of its accounts receivable. On August 1, 2007, Magrath sold special order merchandise and received an interest-bearing note due April 30, 2008. Magrath uses the allowance method to account for uncollectible accounts. During 2007, some accounts were written off as uncollectible, and other accounts previously written off as uncollectible were collected.
Required
1. Explain how Magrath should account for and report the accounts receivable factored on April 3, 2007. Why is this accounting treatment appropriate?
2. Explain how Magrath should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2007 and its December 31, 2007 balance sheet.
3. Explain how Magrath should account for the collection of the accounts previously written off as uncollectible.
4. What are the two basic approaches to estimating uncollectible accounts under the allowance method? What is the rationale for each approach?