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1、Chapter08-ReportingandInterpretingReceivables,BadDebtExpense,andInterestRevenueChapter8ReportingandInterpretingReceivables,BadDebtExpense,andInterestRevenueANSWERSTOQUESTIONS1.Theadvantagesofextendingcreditarethatitallowsacompanytocompeteeffectivelywithcompetitorswhoextendcredit.Theadditio
2、nalgrossprofitearnedfromsellingonaccountisgreaterthantheadditionalcostsincurred.Thedisadvantagesofsellingoncreditincludeincreasedwagecostsincurredinhiringpersonneltomonitorandtrackcreditcustomers,baddebtcostsfromaccountsthatarecollectedlateornotatall,anddelayedreceiptofcash.2.Beforediscont
3、inuingitscreditcardprogram,Kohl’sCorporationwouldhavecomparedthegrossprofitgivenupasaresultoflostcreditcardsalestotheexpensesgivenup(e.g.,baddebts,wagesandadministration,interest).Presumably,Kohl’scancelleditsprivatecreditcardprogrambecausetheextraexpensestorunthecreditcardprogramexceededt
4、hegrossprofitearnedfromit.Inmakingthisdecision,Kohl’swouldnotethatconsumerscouldusenationalcreditcards(suchasVisaandMastercard)ratherthantheKohl’screditcard.3.Inconformitywiththematchingprinciple,theallowancemethodrecordsBadDebtExpenseinthesameperiodinwhichthecreditwasgrantedandthesalewasm
5、ade.Followingtheconservatismconcept,accountingrulesrequireaccountsreceivablebereportedattheamountwhichthecompanyactuallyexpectstocollectratherthanthetotalthatitwouldcollectifeveryonepaid.4.Usingtheallowancemethod,BadDebtExpenseisrecognizedintheperiodinwhich(a)salesrelatedtotheuncollectible
6、accountweremade.5.Thewrite-offofuncollectibleaccountsusingtheallowancemethoddecreasestheassetAccountsReceivableanddecreasesthecontra-assetAllowanceforDoubtfulAccountsbythesameamount.Asaconsequence,(a)netincomeisunaffectedand(b)netaccountsreceivableisunaffected.8-51Chapter08-ReportingandInt
7、erpretingReceivables,BadDebtExpense,andInterestRevenue6.Withtheagingofaccountsreceivablesmethod,thecalculatedamountisthedesiredbalancetowhichtheAllowanceforDoubtfulAccountsistobeadjusted.Thatis,thedifferencebetweenthiscalculatedamountandtheexistingbalanceinthe
