Headquartered in London, England, Pearson is an international company with businesses in education, business information and consumer publishing. Pearson education operations provide learning materials, technologies, assessments and services to educational institutions, corporations and professional organizations, as well as to teachers and students of all ages. In its business information division, Pearson operates FT Publishing, which includes the Financial Times, FT. com and a range of other financial magazines, online services and financial databases. Pearson 's consumer operations, Penguin, operates a series of connected national publishing houses. With sales of £5. 6 billion in 2009, Pearson operates in more than 60 countries. Financial statements are prepared in accordance with IFRS. Shares trade in London and New York (Source: Company Annual Report and Form 20-F)
Refer to the Pearson plc financial statements and footnote excerpts for 2009. All figures are in millions of pounds sterling (L). a. What is an account receivable? What other names does this asset go by? b. How do accounts receivable differ from notes receivable?
c. What is a contra account? What two contra accounts are associated with Pearson's trade receivables (see Note 22)? What types of activities are captured in each of these contra accounts? Describe factors that managers might consider when deciding how to estimate the balance in each of these contra accounts. d. Two commonly used approaches for estimating uncollectible accounts receivable are the percentage-of-sales procedure and the aging-of-accounts procedure. Briefly describe these two approaches. What information do managers need to determine the activity and final account balance under each approach? Which of the two approaches do you think results in a more accurate estimate of net accounts receivable? e. If Pearson anticipates that some accounts will be uncollectible, why did the company extend credit to those customers in the first place? Discuss the risks that managers must consider with respect to accounts receivable. f. Note 22 reports the balance in Pearson's provision for bad and doubtful debts (for trade receivables) and reports the account activity ("movements") during the year ended December 31, 2009. Note that Pearson refers to the trade receivables contra account as a "provision." Under U.S. GAAP, the receivables contra account is typically referred to as an "allowance" while the term provision is used to describe the current-period income statement charge for uncollectible accounts (also known as bad debt expense). i.
Use the information in Note 22 to complete a T-account that shows the activity in the provision for bad and doubtful debts account during the year. Explain, in your own words, the line items that reconcile the change in account during 2009 ii.
Prepare the journal entries that Pearson recorded during 2009 to capture 1) bad and doubtful debts expense for 2009 (that is, the "income statement movements") and 2) the write-off of for 2009 (that is, the "income statement movements") and 2) the write-off of accounts receivable (that is, the amount "utilized") during 2009. For each account in your journal entries, note whether the account is a balance sheet or income statement account.
iii. Where in the income statement is the provision for bad and doubtful debts expense included? g. Note 22 reports that the balance in Pearson's provision for sales returns was £372 at December 31, 2008 and £354 at December 31, 2009. Under U.S. GAAP, this contra account is typically referred to as an "allowance" and reflects the company's anticipated sales returns. i.
Complete a T-account that shows the activity in the provision for sales returns account during the year. Assume that Pearson estimated that returns relating to 2009 Sales to be £425 million. In reconciling the change in the account, two types...
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