Company A uses the aging of accounts receivables method to compute its allowance for bad debts. For accounts that are 30-60 days old, they use a rate of 5% of receivables; accounts that are 60-90 days old, they use a rate of 10%; and 90-120 days old, a rate of 15%. If a customer pays at least two-thirds of the required monthly payment on a delinquent account, that partial, or "curing," payment is sufficient to treat as current the entire account and move it back into the current bucket (on which no allowance is taken). If the customer then fails again to make a required monthly payment,' the account begins the aging process again. Company A is supposed to write off in full any credit accounts on which no payments have been received for 120 days
Suppose Company A made a sale on account for $5000 in February. The customer would be expected to make monthly payments (principal and interest) of $350/month for 18 months. Write the journal entry to record this transaction.
Suppose in June, the customer missed a payment. What should Company A do, based on its stated policy above?
Suppose in July, the customer makes a $250 payment. What should Company A do?
Suppose instead of (3), the customer continues to miss payments in July, August, September and October. What should Company A do in October?
Suppose in November, the customer makes a $250 payment. What should Company A do?
II-What would you as the auditor say to the CEO regarding what has been violated when there is a systematic understatement of bad debts