ACC 2010 "Chapter 8 Material"

In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______.

$760 (38000 * .02 = 760), even if the customers wont pay / will pay until later

In which situations does a company issue a note receivable?

-The company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest. -The company lends money to employees or businesses.

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 ______.

-debit to Bad Debt Expense of 1000 -credit to allowance for doubtful accounts of 1000

Notes receivable are used for ______.

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

Give the correct sequence of events for "for a 2-year note established in November that pays interest annually.":

1. Debit notes receivable and credit cash 2. debit interest receivable and credit interest revenue 3. debit cash and credit interest receivable 4. debit cash and credit notes receivable, interest rev & interest receivable

On July 1, Year 1, the Barley Company loaned $50,000 to the Jackson Co. The note has a stated interest rate of 10% and will mature on June 30, Year 2. All payments for principal and interest will be received at maturity. How much interest revenue will Barley report on its income statement for the year ended December 31, Year 1?

2500 (50000 * .10 * 6 months / 12 months) =2500

Which of the following statements about the receivables turnover ratio is true?

A higher receivables turnover ratio means faster (better) turnover.

Which of the following statements about the receivables turnover ratio is true? A. a higher receivables turnover ration means faster (better) turnover b. the receivables turnover ratio is calculate by dividing net sales revenue by average receivables c. the receivables turnover ratio is calculated by dividing 365 by the number of days to collect receivables d. the receivables turnover ratio measures the average number of days from sale on account to collection

A. a higher receivables turnover ration means faster (better) turnover

Bellows Company uses the allowance method to account for uncollectible accounts. After making a concerted effort, Bellows' management determined that it will not be able to collect the $1,200 owed to it by its customer Acme Inc. Prepare the appropriate journal entry to record the receivable write-off.

Allowance for doubtful accounts (1200 debit) accounts receivable (1200 credit)

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The Accounts Receivable balance is $8,000. Management estimates that 1% of its credit sales will be uncollectible. This adjusting entry includes a debit to ______.

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

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

Which of the following are disadvantages to extending credit to customers?

Delayed receipts of cash Increased wage costs Increased bad debt costs

What is the formula for calculating interest on a note receivable?

Interest = Principal x interest rate x time

Which of the following is the term used to describe the process of selling and collecting?

Receivables turnover

Which of the following is recorded with a debit to Interest Receivable and a credit to Interest Revenue?

The adjusting entry to record interest earned but not yet received

Which of the following is recorded with a debit to Cash and a credit to Interest Receivable?

The receipt of an interest payment for interest previously recorded

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?

The receipt of the principal payment

allowance for doubtful accounts

a permanent account, or its balance carries forward from one accounting period to the next

Removing an uncollectible account and its corresponding allowance from the accounting records is called ______.

a write-off

Which of the following are the steps followed by the allowance method? a. record the estimated bad debts in the period credit sales occur using an end-of-period adjustment b. record the estimated bad debts when they are known to be uncollectible c. write off specific customer balances in the period credit sales occur using an end of period adjustment d. write off specific customer balances when they are known to be uncollectible

a. record the estimated bad debts in the period credit sales occur using an end-of-period adjustment d. write off specific customer balances when they are known to be uncollectible

A sale on account is recorded with a debit to ______ _______ and a credit to ________ ________.

accounts receivable & sales revenue

A sale on account is recorded with a debit to:

accounts recievable

When a company lends money to employees at a rate of 4%, the company will record ______.

an asset called Notes Receivable

Using the allowance method, Bad Debt Expense is recorded _____.

as an estimate in the period of the related credit sales

The challenge businesses face when estimating the allowance for previously recorded sales is that ______.

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

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.

credit; decrease

Allowance to doubtful accounts

credited in the adjustment to record estimated bad debts

Which of the following statements about the days to collect is true? a. a higher number of days to collect receivables is more desirable than a lower number b. the days to collect is calculated by dividing net sales revenue by average net receivables c. the days to collect is calculated by dividing the receivables turnover by 365 d. the days to collect measures the average number of days from sale on account to collection

d. the days to collect measures the average number of days from sale on account to collection

The receipt of an interest payment (journal entry)

debit cash and credit interest receivable

The receipt of the principal payment (journal entry)

debit cash and credit notes receivable

The adjusting entry to record interest owed (journal entry)

debit interest receivable and credit interest revenue

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______.

debit to Bad Debt Expense credit to Allowance for Doubtful Accounts

Notes Receivable differ from Accounts Receivable in that Notes Receivable ______.

do not have to be created for every new transaction, so they are used more frequently

The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ______.

expense recognition (matching) principle

Notes Receivable differ from Accounts Receivable in that Notes Receivable ______.

generally charge the borrowers interest from the day they are signed to the day they are collected

bad debt expense

increased by a debit

What accounts are included in the entry to accrue interest earned but not yet received?

interest receivable, and interest revenue

Which of the following is the term used to describe the process of selling and collecting?

receivables turnover

A receivable write-off removes a non-paying customer's account receivable and ______.

removes the same amount from Allowance for Doubtful Accounts

A sale on account is recorded with a credit to:

sales revenue

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write-off of a specific customer's account

The journal entry to record $5.6 million in sales on account includes a ______.

-credit to Sales Revenue of $5.6 million -debit to Accounts Receivable of $5.6 million

Sales on account ______.

-increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement -increase assets and stockholders' equity

Sales on account:

-increase assets and stockholders' equity -increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement

When accounting for accounts receivable and bad debts, the objectives are to ______.

-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

Two objectives when accounting for accounts receivable and bad debts are to:

1) report accounts receivable at the amount the company expects to collect 2) Match the cost of bad debt to the accounting period in which the related credit sales are unlikely to be collected

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?

The same period as credit sales

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?

The same period as the credit sales

Which of the following are considered disadvantages of allowing customers to purchase goods on credit? a. delay in cash collections b. bad debt costs c. decreased revenues d. increased wage costs to determine if customers are creditworthy e. increased wage costs resulting from the collection process

a. delay in cash collections b. bad debt costs d. increased wage costs to determine if customers are creditworthy e. increased wage costs resulting from the collection process

Which of the following describe a note receivable? a. more formal way of extending credit b. specified interest rate c. specified maturity date d. stronger legal claim e. used for small-dollar items

a. more formal way of extending credit b. specified interest rate c. specified maturity date d. stronger legal claim

Which of the following statements about credit sales are true? A. revenue is reported when the company is paid by the customer b. accounts receivable arise from credit sales c. accounts receivable should be reported at net realizable value d. revenue is reported when the company fulfills its promise to transfer control of a good or service to a customer e. the cost of a bad debt should be recorded in the accounting period in which a business realizes that a customer will not pay the amount owed

b. accounts receivable arise from credit sales c. accounts receivable should be reported at net realizable value d. revenue is reported when the company fulfills its promise to transfer control of a good or service to a customer

The adjusting entry to record the estimated amount of bad credit sales is a debit to ___ _____ ______ and a credit to Allowance for Doubtful Accounts.

bad debt expense

The adjusting entry to record the estimated amount of bad credit sales is a debit to:

bad debt expense

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to ______.

bad debt expense

Madison Inc. reported sales of $1,000,000, a debit balance in Accounts Receivable of $80,000, and a credit balance of $5,000 in the Allowance for Doubtful Accounts. Management anticipates bad debt losses of 1% of credit sales. Prepare the end-of-period adjusting entry to record bad debt expense.

bad debt expense (10000 debit) Allowance for doubtful accounts (10000 credit)

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______.

credits

The issuance of a note (journal entry)

debit notes receivable and credit cash

Broadway Company reported a balance in Accounts Receivable of $50,000 and a zero balance in the Allowance for Doubtful Accounts. The company's aging of accounts receivable determined $12,200 to be uncollectible. Prepare the end-of-period adjusting entry to record bad debt expense

Bad debt expense (12200 debit) allowance for doubtful accounts (12200 credit)

Knelling Company reported a balance in Accounts Receivable of $50,000 and a credit balance of $3,000 in the Allowance for Doubtful Accounts. The company's aging of accounts receivable determined $12,000 to be uncollectible. Prepare the end-of-period adjusting entry to record bad debt expense.

Bad debt expense (9000 debit) allowance for doubtful accounts (9000 credit)

Which of the following is recorded with a debit to Notes Receivable and a credit to Cash?

The establishment of a note

readwell Tire Company had net accounts receivable of $67,900 at the beginning of the year and $72,400 at the end of the year. The company's net sales revenue during the year was $876,875. What was the receivables turnover ratio for the year?

12.5 Average net receivables = ($67,900 + $72,400) ÷ 2 = $70,150 Receivables turnover ratio = Net Sales Revenue of $876,875 ÷ Average net receivables of $70,150 = 12.50

At its December 31 year-end, Accounts Receivable totaled $86,600, aged as follows: (1) 1-30 days old, $71,000; (2) 31-90 days old, $12,000; and (3) more than 90 days old, $3,600. Experience has shown that for each age group, the estimated uncollectible is (1) 12%, (2) 24%, and (3) 48%, respectively. What is the balance to which the Allowance for Doubtful Accounts will need to be adjusted at the end of the period?

13128 (71000*.12 + 12000*.24 + 3600*.48 ) = 13128

An adjusting entry to accrue for interest earned is often needed when a company has ______.

Notes recievable