ACC 120 Chapter 8

The receipt of the principal payment

matches Choice, debit Cash and credit Notes Receivable debit Cash and credit Notes Receivable

The objectives when accounting for accounts receivable and bad debts are to ______. (Check all that apply.) Multiple select question. report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect. match the cost of bad debts to the accounting period in which the related credit sales are made increase both accounts receivable and net income by the amount of credit sales that are unlikely to be collected as cash

report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect. match the cost of bad debts to the accounting period in which the related credit sales are made

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet. Multiple choice question. the same as $100 less than $100 greater than

$100 less than Reason: The method used is the Percentage of Sales method whereby the expense is calculated first and then the balance in the Allowance for Doubtful Accounts is determined. The adjusting entry includes a debit to Bad Debt Expense (+E,-SE) of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts (+xA,-A). After adjustment, the Allowance will have a $1,100 credit balance (=$1,000 credit + 100 credit) on the balance sheet and Bad Debt Expense will equal $1,000 on the income statement. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's credit sales. The expense is a temporary account and reports only the expense on the current period's credit sales.

1percentage of credit sales 2percentage of credit sales 3direct write off

1 Choice, simpler to apply but less accurate simpler to apply but less accurate 2 matches Choice, uses more detailed data and is more accurate uses more detailed data and is more accurate 3 not considered an acceptable method under GAAP

The days to collect ratio is computed as ______ Multiple choice question. 365 divided by Average Net Receivables 365 divided by the Receivable Turnover Ratio net sales divided by Average Net Receivables

365 divided by the Receivable Turnover Ratio

Sales on account will cause an increase in ______. (Select all that apply.) Multiple select question. Accounts Receivable on the balance sheet Sales Revenue on the income statement Allowance for Doubtful Accounts on the income statement Accounts Payable on the balance sheet

Accounts Receivable on the balance sheet Sales Revenue on the income statement Reason: Sales on account are recorded with a debit to Accounts Receivable (+A on the balance sheet) and a credit to Sales Revenue (+SE on the income statement).

Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer? Multiple choice question. Increased bad debt expense Increased labor costs Additional sales revenue

Additional sales revenue

Percentage of credit sales

Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

Aging of accounts receivable

Estimates the allowance for doubtful accounts based on the age of each account receivable

Why is Bad Debt Expense an estimate? Multiple choice question. GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay. The revenue recognition principle requires sales on account be recorded when the amounts are collected. Bad Debt Expense is not an estimate. It is recorded when a customer's Accounts Receivable is deemed uncollectible.

GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay. Reason: In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

Percentage of credit sales method

Reason: This method estimates the amount of the Bad Debt Expense and then the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance.

The receipt of an interest payment

Reason: The receipt of an interest payment The entry for the receipt of interest includes a debit to Cash (+A) and a credit to Interest Receivable (-A) for any interest generated the previous accounting period and a credit to Interest Revenue (+SE) for the interest earned in the current accounting period.

When a company lends money to employees at a rate of 4%, the company will record ______. Multiple choice question. a liability called Notes Payable an asset called Accounts Receivable an asset called Notes Receivable a liability called Accounts Payable

an asset called Notes Receivable

The challenge businesses face when estimating the allowance for previously recorded sales is that ______. Multiple choice question. at the time of the sale, it is not known which particular customer will be a "bad" customer past default rates are not a good predictor of future default rates in bad economic times, fewer customers will have problems with their payments

at the time of the sale, it is not known which particular customer will be a "bad" customer

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______. (Check all that apply.) Multiple select question. credit to Accounts Receivable debit to Accounts Receivable credit to Allowance for Doubtful Accounts debit to Bad Debt Expense credit to Bad Debt Expense

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense

The issuance of a note

debit Notes Receivable and credit Cash

The journal entry for the direct write-off method includes a ______. (Check all that apply.) Multiple select question. debit to Bad Debt Expense credit to Accounts Receivable credit to Allowance for Doubtful Accounts debit to Sales Revenue

debit to Bad Debt Expense credit to Accounts Receivable

The adjusting entry to record the allowance for doubtful accounts includes a ______. (Check all that apply.) Multiple select question. credit to Bad Debt Expense debit to Accounts Receivable debit to Bad Debt Expense debit to Sales Revenue credit to Allowance for Doubtful Accounts credit to Sales Revenue debit to Allowance for Doubtful Accounts credit to Accounts Receivable

debit to Bad Debt Expense credit to Allowance for Doubtful Accounts

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. (Select all that apply.)

debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000

If a company writes off a specific customer's account with a debit to Bad Debt Expense and credit to Accounts Receivable, it must be using the ______ method. Multiple choice question. aging of accounts receivable percentage of credit sales direct write-off

direct write-off Reason: The direct write-off, which is not GAAP because it violates the expense recognition (matching) principle, does not record an adjusting entry to estimate the amount of uncollectible accounts. Instead it waits until specific customers are identified as non-paying and writes them off debiting Bad Debt Expense, often in a different accounting period then when the related credit sales were made to these customers.

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______. Multiple choice question. adjusting entry to allow for estimated bad debts write-off of a specific customer's account subsidiary entry to increase a customer's account for credit sales net realizable entry to report the amount expected to be collected

write-off of a specific customer's account

Notes receivable are used for ______. (Check all that apply.) Multiple select question. purchasing property, plant, and equipment extending payment periods lending money to individuals or businesses selling large dollar-value items recording bad debt expense

extending payment periods lending money to individuals or businesses selling large dollar-value items

Net sales revenue is $730,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the days to collect. Multiple choice question. 30 days 43 days 32 days 23 days

30 Reason: Days to collect=365 days/accounts receivable turnover. Days to collect equals 30 days (=365/($730,000/(($62,000+$58,000)/2)),

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance? Multiple choice question. Percentage of credit sales method Aging of accounts receivable method Direct write-off method

Aging of accounts receivable method

The direct write-off method does not require the ______ account. Multiple choice question. Accounts Receivable Bad Debt Expense Allowance for Doubtful Accounts

Allowance for Doubtful Accounts Reason: The direct write-off method (non-GAAP because it violates the expense recognition or matching principle) includes a credit to Accounts Receivable, not Allowance for Doubtful Accounts. The allowance method (GAAP) includes a credit to Allowance for Doubtful Accounts and is recorded in the period the sale is made, not later when it is discovered that the customer's account is uncollectible.

The receipt of an interest payment

Choice, debit Cash and credit Interest Receivable debit Cash and credit Interest Receivable

The adjusting entry to record interest owed

Choice, debit Interest Receivable and credit Interest Revenue debit Interest Receivable and credit Interest Revenue

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. (Select all that apply.) Multiple select question. debit to Bad Debt Expense of $1,000 debit to Bad Debt Expense of $1,100 credit to Allowance for Doubtful Accounts of $900 credit to Allowance for Doubtful Accounts of $1,100 debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $1,000

debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000

Notes receivable are used for ______. (Check all that apply.) Multiple select question. extending payment periods purchasing property, plant, and equipment selling large dollar-value items lending money to individuals or businesses recording bad debt expense

extending payment periods selling large dollar-value items lending money to individuals or businesses

Sales on account ______. (Check all that apply.) Multiple select question. increase Accounts Payable on the balance sheet and Sales Revenue on the income statement increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement increase assets and decrease stockholders' equity increase assets and stockholders' equity increase liabilities and stockholders' equity increase Cash on the balance sheet and Sales Revenue on the income statement

increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement increase assets and stockholders' equity Reason: Sales on account are recorded with a debit to Accounts Receivable (+A) and credit to Sales Revenue (+SE). Later, the collection of cash is recorded with a debit to Cash (+A) and a credit to Accounts Receivable (-A).

Which of the following is contra-asset account? Multiple choice question. Allowance for Doubtful Accounts Deferred Revenue Common Stock Depreciation Expense

Allowance for Doubtful Accounts Accumulated Depreciation (+xA,-A) is also a contra-asset account and is credited when Depreciation Expense (+E,-SE) is debited to record the estimated amount of the usefulness consumed during the period.

Which of the following are contra-asset accounts? (Check all that apply.) Multiple select question. Allowance for Doubtful Accounts Deferred Revenue Accumulated Depreciation Common Stock

Allowance for Doubtful Accounts Accumulated Depreciation

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable? Multiple choice question. Establishing a note The receipt of an interest payment The receipt of the principal payment The adjusting entry to record interest owed

The receipt of the principal payment

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period? Multiple choice question. The same period as credit sales The period after credit sales are made The period before credit sales are made

The same period as credit sales

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? Multiple choice question. Increase Bad Debt Expense. Write off the uncollectible account and its corresponding allowance from the accounting records. Nothing, as Bad Debt Expense has already been recorded.

Write off the uncollectible account and its corresponding allowance from the accounting records.

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? Multiple choice question. Nothing, as Bad Debt Expense has already been recorded. Write off the uncollectible account and its corresponding allowance from the accounting records. Increase Bad Debt Expense.

Write off the uncollectible account and its corresponding allowance from the accounting records.

Which of the following are advantages to extending credit to customers? (Check all that apply.) Multiple select question. Increased demand Increased bad debt costs Increased wage costs Increased sales Delayed receipts of cash

Increased demand Increased sales