Week 5 Intermediate Accounting

INTERMEDIATE ACCOUNTING

7-65 . Accounting for Uncollectibles

During the audit of accounts receivable of Montana Company , the new CEO Joe Frisco , asked why the company had debited the current year expense for bad debts on the assumption that some accounts will become uncollectible next year . Frisco believes that the financial statements should be based on verifiable , objective evidence . In his opinion it would be more objective to wait until specific accounts become uncollectible before the expense is recorded

What accounting issues are involved

The issues involved here is whether the two

methods of setting up of the bad debts expense . This is estimated accounts receivable that may not be collected . First , the account title Doubtful accounts expense is debited and the journal entry debiting allowance for doubtful accounts is credited in the year of sale . The amount recorded here is the amount estimated to be uncollectible based on either percentage of sales method or aging of the accounts receivable end amount . Second , the account title is debited to Doubtful accounts expense and credited to Accounts Receivable . This is the stand emphasized by Mr Joe Frisco , CEO of Montana Company . This second method is not allowed for financial accounting presentation as stated by the United States Generally Accepted Accounting Principles (Siegel et al , 2002 p148 . The main reason given by the United States generally accepted accounting principles is that that second method DOES NOT match expense specifically doubtful accounts expense ) to the sales (accounts receivable sales and notes receivable sales only ) of the same year

Which method of accounting for uncollectible accounts would you recommend and why

Obviously , the method of accounting for uncollectible accounts I would recommend is the first method . For , the first method is the only one allowed by the United States generally accepted accounting principles . The second methods is prohibited under the same United States generally accepted accounting principles . The only reason I chose the first method is that the second method DOES NOT match expense specifically doubtful accounts expense ) to the sales (accounts receivable sales and notes receivable sales only ) of the same year . On the other hand , the first method matches the doubtful accounts expense to the related accounts receivable sales or notes receivable sales

8-55 . What is the Difference Between Completed-Contract and Percentage-of-Completion Accounting

In accounting for long-term contracts (those taking longer than 1 year to complete , the two methods commonly followed are the percentage-of-completion method and the completed-contract method

1 . Discuss how earnings on long-term contracts are recognized and computed under these 2 methods

A construction contract is a contract that is agreed upon for the construction of an asset ( usually a building ) in terms of design technology and function or their ultimate purpose . There are two accepted methods of accounting for long term construction contracts identified as completed contract method and percentage of completion method

Completed Contract Method United States Generally Accepted Accounting Principles states that the completed contract method recognizes the sales and costs only when the construction is completed . For...