Week 2 Individual Chapter 8 – p. 399 3. What are the essential features of the allowance method of accounting for bad debts? 4. Lauren Anderson cannot understand wh

Week 2

Individual

Chapter 8 – p. 399

 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.

EXERCISE 8-5 – p. 401

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.

Â

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

Â

$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.

EXERCISE 9.9 – p. 401

The Write-Down of Impaired Assets

LO4

LO7

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.

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