The chapter has been updated. The SEC’s SAB101 Revenue Recognition tests have been added.
Approach
The sequence of transactions for accounts receivable and bad debts often causes difficulty; indeed, the time that one is sometimes forced to spend on this topic is all out of proportion to its importance. Students often do not understand why an Allowance for Bad Debts account is necessary at all; they do not grasp the notion that although we feel reasonably sure that some accounts will go bad, we do not know which ones they will be. Even when they do understand this, the chain of transactions involved in estimating bad debts, writing off specific accounts, and booking bad debts recovered, is complicated and not easy to follow.
If experience is any guide, it is quite likely that at the time this chapter is taught the press will be describing a company that has gotten into trouble for overstating its revenue or understating its bad debt or warranty allowance. Discussion of such a situation would be interesting.
Cases
Stern Corporation (A) is a straightforward problem in handling accounts receivable and bad debts.
MacDonald’s Farm, by contrast, has few technical calculations but provides an excellent opportunity for a realistic discussion of alternative ways of measuring revenue and of valuing assets.
Joan Holtz (A) is a different type of case. It is a device for raising several discrete, separable problems about the subject matter of the chapter, from which the instructor can pick and choose those he or she wishes to take up in class. (It probably is not feasible to discuss all of them.)
Bausch & Lomb, Inc., is an actual case situation involving revenue recognition.
Boston Automation Systems, Inc. involves a review of the company’s revenue recognition practices in the light
