You must show all of your work for each problem. Make sure your workflows logically and solutions are identified clearly.  If any problems involving writing, please use complete sentences.Writing Off a Large Uncollectable Receivable: Concept Connection1. Canaday Ltd. has the following receivables balances ($M):Gross accounts receivable $175 Bad-debt reserve                  (3)     Net accounts receivable     $172Two years ago a customer was approved for an unusually large credit sale of $7M over the objections of the credit and collections department. Shortly after the sale, the customer’s business began to deteriorate due to an unexpected recession. To date, it has paid only $2M against the order despite the fact that it has consumed all of the material purchased. The collections department has worked diligently to collect the remaining $5M without success. The customer filed for bankruptcy this morning with essentially no assets to pay a large number of creditors. Evaluate the financial statement impact of the bankruptcy on Canaday. Assume Canaday’s product cost is 40% of revenue and the bad-debt reserve of $3M will be fully reestablished.

Question
Asked Jun 30, 2019

You must show all of your work for each problem. Make sure your workflows logically and solutions are identified clearly.  If any problems involving writing, please use complete sentences.

Writing Off a Large Uncollectable Receivable: Concept Connection

1. Canaday Ltd. has the following receivables balances ($M):

Gross accounts receivable $175
Bad-debt reserve                  (3)     
Net accounts receivable     $172

Two years ago a customer was approved for an unusually large credit sale of $7M over the objections of the credit and collections department. Shortly after the sale, the customer’s business began to deteriorate due to an unexpected recession. To date, it has paid only $2M against the order despite the fact that it has consumed all of the material purchased. The collections department has worked diligently to collect the remaining $5M without success. The customer filed for bankruptcy this morning with essentially no assets to pay a large number of creditors. Evaluate the financial statement impact of the bankruptcy on Canaday. Assume Canaday’s product cost is 40% of revenue and the bad-debt reserve of $3M will be fully reestablished.

 

 

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Expert Answer

Step 1

Bad debt reserves are used by the business to write off any bad debt expenses arising in the course of the business. The provision for bad debt created every year is charged to the Income statement and the provision balance remaining after setting off the actual bad debts in the year is shown as the reduction to the Accounts Receivable balance in the balance sheet.

When the actual bad debts are more than the Bad debt reserves, the excess amount is charged off to the Income statement.

Step 2

In the given situation. $5 M accounts receivable have gone bad. So, we need to write off the Accounts Receivable by $5M by crediting the account, and correspondingly Bad debt Reserves will be debited by $3 M an...

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