Question

The credit manager of Montour Fuel has gathered the following information about the company’s accounts receivable and credit losses during the current year:
Net credit sales for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,000,000
Accounts receivable at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750,000
Uncollectible accounts receivable:
Actually written off during the year . . . . . . . . . . . . . . . . . . . . . . . . . $96,000
Estimated portion of year-end receivables expected to prove
uncollectible (per aging schedule). . . . . . . . . . . . . . . . . . . . . . . . 84,000 180,000
Prepare one journal entry summarizing the recognition of uncollectible accounts expense for the entire year under each of the following independent assumptions:
a. Uncollectible accounts expense is estimated at an amount equal to 2.5 percent of net credit sales.
b. Uncollectible accounts expense is recognized by adjusting the balance in the Allowance for Doubtful Accounts to the amount indicated in the year-end aging schedule. The balance in the allowance account at the beginning of the current year was $25,000. (Consider the effect of the write-offs during the year on the balance in the Allowance for Doubtful Accounts.)
c. The company uses the direct write-off method of accounting for uncollectible accounts.
d. Which of the three methods gives investors and creditors the most accurate assessment of a company’s liquidity? Defend your answer.



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  • CreatedApril 17, 2014
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