Orange Company has an operating cycle of less than one year and provides credit terms for all of its customers. On May 20, 2022, the company factored, without recourse, some of its accounts receivable. On October 1, 2022, Orange Company sold special order merchandise and received an interest-bearing note due June 30, 2023. Orange Company uses the allowance method to account for uncollectible accounts. During 2022, some accounts were written off as uncollectible, and other accounts previously written off as uncollectible were collected. a) Discuss how Orange Company should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2022 and its December 31, 2022 Statement of Financial Position. b) Discuss how Orange Company should account for the collection of the accounts previously written off as uncollectible. c) What are the two basic approaches to estimating uncollectible accounts under the allowance method and discuss? What is the rationale for each approach?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
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