Situation During 2007, one of the customers of Klote Company declared bankruptcy. This customer had been a major purchaser of Klote’s products and had owed $40,000 on account to Klote (a material portion of its receivables) at the time of bankruptcy. As a result of the bankruptcy, Klote had to write off the entire $40,000 account receivable of the customer as a loss. The president of Klote is concerned about how to report this loss on the company’s 2007 income statement. The president says, “Since this company that went bankrupt was a major customer, surely that is an unusual and infrequent event, and the $40,000 should be reported as an extraordinary loss. What do you think?”
Directions Research the related generally accepted accounting principles and prepare a short memo to the president that summarizes how to report the $40,000 loss on Klote’s 2007 income statement. Cite your reference and applicable paragraph numbers.