Uncollectible Accounts--Two Methods
at the End of the Year the Unadjusted

question 160

Essay

Uncollectible accounts--two methods
At the end of the year the unadjusted trial balance of Angel Provisions included the following accounts:
(a.) If Angel uses the balance sheet approach to estimate uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $6,075, what will the uncollectible accounts expense for the year be?
(b.) If the income statement approach to estimating uncollectible accounts expense is followed, and uncollectible accounts expense is estimated to be 1% of net credit sales, what is the amount of uncollectible accounts expense for the year?
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Sales } ( 80 \% \text { represent credit sales) } & & \$ 780,575 \\\hline \text { Accounts Receivable } & \$ 101,475 & \\\hline \text { Allowance for Doubtful Accounts } & & \$ 1,218 \\\hline\end{array}$$

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Definitions:

Cost of Capital

A rephrasing: The minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital.

NPV

Net Present Value; a calculation used to assess the value of a project or investment by determining the present value of future cash flows.

Certainty Equivalent Factors

Refers to adjustments made to uncertain (risky) cash flows to equate them to certain cash flows, used in investment decision-making.

Risk Adjusted Discount Rate

A rate used in capital budgeting that adjusts for the risk of cash flows, providing a way to account for the riskiness of the project.