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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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When a company receives a deposit from a customer to protect itself against nonpayment for future services, the deposit should be classified by the company as:

  1. a. revenue
  2. b. a liability
  3. c. part of the allowance for doubtful accounts
  4. d. a deferred credit deducted from accounts receivable

To determine

Identify the manner by which the given deposit must be classified by the company.

Explanation

Liabilities:

The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Justification for the correct answer:

Option a:

When company receives deposit from the customer to protect the company from the nonpayment for future services it will not be treated as revenue because when money is borrowed they are considered as notes payable and they are promissory note which requires to the borrower of the money to repay the amount borrowed on a specific date. Therefore, Option a is an incorrect answer.

Option c:

When company receives deposit from the customer to protect the company from the nonpayment for future services it will not be treated as a part of allowance for doubtful accounts because when money is borrowed they are considered as notes payable and they are promissory note which requires to the borrower of the money to repay the amount borrowed on a specific date. Therefore, Option c is an incorrect answer...

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