Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers.On April 1, 2018, the company factored, without recourse, some of its accounts receivable. Magrath transferredthe 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 2018, some accounts werewritten off as uncollectible and other accounts previously written off as uncollectible were collected.Required:1. How should Magrath account for and report the accounts receivable factored on April 1, 2018? Why is thisaccounting 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 isthe rationale for each approach?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers.
On April 1, 2018, 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 2018, some accounts were
written off as uncollectible and other accounts previously written off as uncollectible were collected.
Required:
1. How should Magrath account for and report the accounts receivable factored on April 1, 2018? 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?
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