Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 1, 2011, the company factored, without recourse, some of its accounts receivable. Magrath transferred the receivables to a financial institution, and will have no further association with the receivables.
Magrath uses the allowance method to account for uncollectible accounts. During 2011, some accounts were written off as uncollectible and other accounts previously written off as uncollectible were collected.
1. How should Magrath account for and report the accounts receivable factored on April 1, 2011? Why is this accounting treatment appropriate?
2. How should Magrath account for the collection of the accounts previously written off as uncollectible?
3. What are the two basic approaches to estimating uncollectible accounts under the allowance method? What is the rationale for each approach?