Question

Nordegg Ltd. (Nordegg) recently learned that a major customer would be permanently shutting down its operations within 30 days. The reason for the shut-down isn't clear but Nordegg's management assumes there are financial problems underlying the decision. As of Nordegg's year-end, it isn't clear whether it will receive any of the $50,000 owed to it by the customer. Despite the uncertainty regarding collection, Nordegg's management decided it would write off the $50,000 receivable in the current fiscal year.

Required:
a. Prepare the journal entry that Nordegg would prepare if it were using the direct writeoff method of accounting for uncollectible amounts. What would be the effect on net income of the entry?
b. Prepare the journal entry that Nordegg would prepare if it were using the percentage-of-credit-sales method of accounting for uncollectible amounts. What would be the effect of the entry on net income?
c. Prepare the journal entry that Nordegg would prepare if it were using the percentage of-receivables method of accounting for uncollectible amounts. What would be the effect of the entry on net income?
d. Why do you think that Nordegg decided to write off the receivable in the current fiscal year, even though it didn't know whether it would be paid or not? In your answer, consider accounting principles and the objectives of accounting.



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  • CreatedFebruary 26, 2015
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