Topic: Allowance Account

• Jim:
• This year has been great for business with fantastic customers. This should definitely help our net income and bonuses for the year!

• Nancy:
• Exactly what do you mean, Jim?

• Jim:
• Well, with great customers who should pay their bills, we will not need to establish an allowance for doubtful accounts for our accounts receivable.

• Nancy:
• Wait a minute, Jim. In my accounting classes, we always recorded bad debts expense and the related allowance account. Therefore, I believe we need to estimate our bad debts and prepare an adjusting entry at year-end.

• Jim:
• But with good customers, I dont think it is required to establish an allowance account. Without recording bad debts expense, our net income should increase by $250,000, which definitely helps our year-end bonuses!

• Nancy:
• We need to check whether this is acceptable under GAAP.

Required: Use the FASB Codification to determine whether GAAP requires the establishment of an allowance account for all accounts receivable. What specific Codification references support your conclusion?

Topic: Inventory Valuation National Drilling is a manufacturer of drill bits for large oil rigs that operate around the world. A major component in the manufacturing of the drill bits is diamonds. As a result of an increase in oil drilling due to the increase in oil prices, National Drilling has received, and is expected to receive, an increase in orders for new and replacement drill bits. With such a potential demand, National Drilling has purchased a large quantity of diamonds. Since diamonds are considered a precious metal, National Drilling is contemplating the proper valuation of its inventory, which is currently above cost.

Management has concluded that precious metals with a fixed monetary value and without substantial marketing costs can be recorded at market value, as discussed at a recent oil and gas conference that Nationals accounting staff attended. As a member of the staff, you question the proper valuation of the diamond inventory.

Required: Utilizing the FASBs Codification, determine with specific authoritative reference the proper valuation of the diamond inventory. What specific Codification references support your conclusion?