accounting 5.1

what accounts are contra-revenues?

sales returns and sales allowances

A(n) _____ _____ is the legal right to receive cash from a credit sale and represents an asset of the company.

accounts receivable

Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:

sales return

A company will debit ___________ when recording a credit sale.

AR

T/F: A company makes a credit sale for $500. Future collection from the customer is probable. The company will not record revenue from the transaction until it collects cash from the customer.

False

Which of the following are classified as receivables? (2)

Loans by a company to other entities; Interest due from loans to customers

T/F: Credit sales involve benefits and costs. A benefit of selling on credit is that the seller makes it more convenient for customers to purchase goods and services. A cost of selling on credit is that there is a delay in collecting cash from customers.

True

T/F: The balances in sales returns, allowances, and discounts are subtracted from total revenues when calculating net revenues.

True

Trade discounts represent:

a reduction in the listed price of a good or service.

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 6. The receipt of payment will include a:

debit to Cash for $980

what is a contra-revenues normal balance account? and where is it found?

debit; income statement

Income tax receivable is a ______.

nontrade receivable

Identify the likely advantage(s) of extending credit to customers:

increases sales

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.) (2)

sales on account and credit sales.

A cleaning company generally charges $220 for a detailed cleaning of a normal-size home. However, to generate additional business, the cleaning company is offering a new-customer discount of 10%. On May 1, an individual has the cleaning company clean her house and pays cash equal to the discounted price. Required: Record the revenue recognized by the cleaning company on May 1.

May 1: Debit Cash $198, Credit service revenue $198

Eric Company has the following information: Total Revenues $860,000 Sales Returns and Allowances $150,000 Sales Discounts $30,000 Ending Inventory $100,000 What is the amount of net revenues for Eric Company?

$680,000

The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:

Accounts receivable

How are trade discounts recognized?

By recording the sale at a discounted price

Fleming Corp. provided services for cash. The transaction would be recorded with a debit to:

Cash

Flounder Corp. sold $12,000 of services on account. When Flounder collects on the account, the transaction will include a debit to

Cash

Identify the likely disadvantage(s) of extending credit to customers A. Delay or failure to collect cash B. Lower profitability C. Lower revenues D. All of the other answers are disadvantages of extending credit to customers

Delay or failure to collect cash

On March 12, Medical Waste Services provides services on account to Grace Hospital for $11,000, terms 2/10, n/30. Grace does not pay for services until March 31, missing the 2% sales discount. For Grace Hospital, record the purchase of services on account on March 12 and the payment of cash on March 31. (2 ENTRIES)

March 12: Debit Service Exp $11,000, credit AP $11,000 March 31: debit AP $11,000, credit Cash $11,000

On March 12, a company provides services on account to an individual Hospital for $10,300, terms 3/10, n/30. An individual does not pay for services until March 31, missing the 3% sales discount. Required: For the company, record the service on account on March 12 and the collection of cash on March 31. (2 ENTRIES)

March 12: debit AR $10,300, credit Service rev $10,300 March 31: debit Cash $10,300, credit AR $10,300

A trade discount results in...

Revenue being recorded for the discounted price.

If sales returns are incorrectly treated as expenses, what are the effects on the financial statements? (Select all that apply.) (2)

Revenues are overstated. Expenses are overstated.

A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:

Sales Discounts for $24

Net revenues is calculated as total revenues minus which of the following items? (3)

Sales returns Sales discounts Sales allowances

The two conditions that must exist for a sale and the related receivable to be recognized are

collection from the customer is probable. the company has provided goods or services to the customer.

Sales Returns is an example of a(n) ____________ account, which is used to keep a record of reductions from revenue due to sales returns separate from total revenue itself.

contra revenue

On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a:

credit to Accounts Receivable

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 24. The receipt of payment will include a:

credit to Accounts Receivable for $1,000

Merry Maidens Cleaning generally charges $300 for a detailed cleaning of a normal-size home. However, to generate additional business, Merry Maidens is offering a new-customer discount of 10%. On May 1, Ms. E. Pearson has Merry Maidens clean her house and pays cash equal to the discounted price. Record the revenue recognized.

debit cash $270, credit service revenue $270

On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:

debit to Sales Returns

On March 12, Medical Waste Services provides services on account to Grace Hospital for $11,000, terms 2/10, n/30. Grace pays for those services on March 20. For Medical Waste Services, record the service on account on March 12 and the collection of cash on March 20. (2 ENTRIES)

march 12: debit AR $11,000, credit service rev $11,000 March 20: debit cash $10,780, debit sales discounts $220, credit AR $11,000

The contra revenue accounts sales returns and sales allowances reduce

revenues.

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting accounts receivable and debiting:

sales allowance

When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay w/in 10 days. This is an example of a:

sales discount

Fleming Corp. provided services on account. The transaction would be recorded with a credit to:

service revenue

Glasser Corp. provided $20,000 of services on account. The account that should be credited is

service revenue.