Just need a couple sentences explaining 1, 2 and 3. Thank you for your help in c
ID: 2529255 • Letter: J
Question
Just need a couple sentences explaining 1, 2 and 3.
Thank you for your help in clarifying this for me!
Judgment Case 7-1 Accounts and notes receivable 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 writlen 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?Explanation / Answer
Requirement 1 Magarth company will pass following journal entry in their books Cash Debit Factoring expense/Discount on factoring Debit Due from Factor(if factor retained the amount towards doubtful debts) Debit Accounts receivable Credit This accounting treatment is appropriate because it takes into account all the transaction in the factoring withour recourse Requirement 2 Magarth Company should accounts for the collection of accounts previously written off as uncollectible as follows Accounts Receivable Debit Allowance for doubtful debts Credit To record the restating accounts receivable Cash Debit Accounts Receivable Credit To record the collection of accounts receivable Requirement 3 First approach is about measuring doubtful debts as a percentage of sales Second approach is about measuring doubtful debts as a percentage of ending accounts receivable Second approach may depends on aging of accounts receivable for calculating the doubtful debts
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