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Chapter 7: Q4Q (page 362)
Springsteen Inc. reported in a recent annual report “Restricted cash for debt redemption.” What section of the balance sheet would report this item?
Theasset section of the balance sheet would report the above provided item.
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Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.
Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Instructions
(a) What are the deficiencies of the direct write-off method?
(b) Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?
(c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?
Roeher Company sold \(9,000 of its specialty shelving to Elkins Office Supply Co. on account. Prepare the entries when (a) Roeher makes the sale, (b) Roeher grants an allowance of \)700 when some of the shelving does not meet exact specifications but still could be sold by Elkins, and (c) at year-end; Roeher estimates that an additional $200 in allowances will be granted to Elkins.
Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
3. Which of the following statements is false?
(a) Receivables include equity securities purchased by the company.
(b) Receivables include credit card receivables.
(c) Receivables include amounts owed by employees as a result of company loans to employees.
(d) Receivables include amounts resulting from transactions with customers.
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