Question 1

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.

1. 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.
2. Discuss how Orange Company should account for the collection of the accounts previously written off as uncollectible.
3. What are the two basic approaches to estimating uncollectible accounts under the allowance method and discuss? What is the rationale for each approach?