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On January 1, Xtreme Co. began offering credit with terms of n/30. Uncollectible accounts are estimated to be 1% of credit sales, which is the average for the industry. The CEO, Todd Hurley, has no background in accounting and is struggling to understand the allowance method. Write a brief memo to Todd, explaining the allowance method and how this information is reported in the financial statements.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Chapter
Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 9, Problem 4CP
Textbook Problem
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On January 1, Xtreme Co. began offering credit with terms of n/30. Uncollectible accounts are estimated to be 1% of credit sales, which is the average for the industry. The CEO, Todd Hurley, has no background in accounting and is struggling to understand the allowance method.

Chapter 9, Problem 4CP, On January 1, Xtreme Co. began offering credit with terms of n/30. Uncollectible accounts are Write a brief memo to Todd, explaining the allowance method and how this information is reported in the financial statements.

To determine

Write a memo to Person TH, CEO of Company X explaining the allowance method and how this information is reported in the financial statements.

Explanation of Solution

Allowance method: It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Write a memo to Person TH, CEO of Company X explaining the allowance method and how this information is reported in the financial statements.

Memo

From,

Person D

To,

Person TH,

CEO of Company X,

Respected sir,

It is my pleasure to explain about the allowance method and how that in information is reported in the financial statements.

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business.

There is a chance of default in collecting cash on account. But it is not possible to predict the particular customer, whose account will be uncollectible due to default. In such situation past records related to the portion of accounts receivable that has become uncollectible in the past helps, to estimate the amount of accounts receivable that will be uncollectible. Allowance method of recording estimated uncollectible receivable used to pass an adjusting entry to record the bad debt expense.

Since, it is not possible to predict and remove the particular customer, whose account will be uncollectible due to default...

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Chapter 9 Solutions

Financial Accounting
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