ACCT 201: Chapter 5

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

collection from the customer is reasonably assured. the earnings process is virtually complete.

The sales discount account is a contra ______ account.

contra "revenue" = sales discount account

accounts receivable are classified as current assets because

they will be converted to cash within 1 year of the normal operating cycle.

Which of the following are contra revenue accounts? Sales discounts trade discounts unearned revenues sales returns

sales discounts sales returns

Net Revenues =

Net Revenues = total revenues - discounts - returns - allowances

A company makes a sale on terms 2/10, n/30. What does this mean?

- If the discount is not taken in 10 days, the net amount is due in 30 days. - The customer may take a 2% discount off the price if paid within 10 days.

Trade Discounts

- be a way to change prices without publishing a new price list - to disguise prices from competitors

Bad Debt Expense

...

Income Statement:

Robert's Dental Income Statement (Partial) Service Revenue $432 Sales Discounts ($18) Net Service Revenue $432

Journal Entries: Paid after 10 day period with no discounts.

Robert's Dental Records Jan. 31 Dr. Cr. Cash 450 Accts. Receivable 450

Matching a price of a competitor after services are already provided

Roberts Dental Records Sales Allowance Jan. 5 Dr. Cr Sales Allowance 50 Account Receivable 50

On Oct. 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100K, 8%, 6-month interest bearing note from Dark in payment for the goods. The entry required on Light's books on Dec. 31, would require which of the following entries?

The 8% is an annual rate and since only 3/12 of a year has been earned, interest revenue is $2,000 (=$100,000*0.08*(3/12)) So Debit Interest Revenue $2,000; credit interest income $2,000.

Sales Discount is recorded as

a contra revenue account because it keeps a record of the total revenue seperate from the reduction in that revenue due to the quick payment.

To record bad debts at the end of the period, an adjustment would be made by a credit to

allowance for uncollecitble accounts.

Accounts receivable should be classified as a

current asset

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10% 3 month interest bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

debit to notes receivable, $40,000

Adrian Corp. Sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The entry Adrian makes on May 15 will include a

debit to sales returns credit to cash

Sales Discount

discount for customer to pay amount in a timely manner.

n/30

if customer doesn't take discount, the full payment is due within 30 days.

Gross accounts receivable less allowance for doubtful accounts is the ____ _____ _____ of accounts receivable.

net realizable value

The amount that is actually expected to be collected on accounts receivable is referred to as

net realizable value.

Income tax receivable is a ______ receivable

nontrade

A sales return occurs when a customer returns a product for a full refund, whereas a sales _______ is when the customer keeps the product and obtains a partial refund.

allowance

Journal Entries: Paid in full

Roberts Dental Record Sales Discount Jan. 10 Dr Cr Cash 432 Sales Discount (4%) 18 Accts Receivable 450

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

service revenue because; the entry will require a debit to accounts receivable.

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectiable.

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net realizable value of accounts receivable?

$18,000

4/10

4% discount within 10 days.

When an account previously written off is collected in full, which enteries are required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Example Partial Income Statement with Bad Debt

Co. Income Statement (Partial) For the year end.............Dec. 31, 2013 Credit Sales $30 Bad Debt Expense (2) $28

Joyce Corp uses the percentage-of-credit sales method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

Credit to Accounts Receivable Debit to allowance for Uncollected accounts

Credit sales:

DR CR Accounts Receivable $$$ .....Service Revenue $$$ Less the discount

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following?

Debit Accounts Receivable Credit Allowance for Uncollectible Accounts

Adrian Corp. Sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15?

Debit to sales returns credit to accounts receivable

...

Dec. 31 DR. CR. Bad Debt Expense $ Allowance for Uncollectible $ (Estimate future bad debts)

Claire Corp's accounting records indicate: Account: Beg. Bal End Bal Acct Rec' 110K 140K Allowance Unc. 12K 19K During the year, Claire wrote off 9K of accounts receivable that were uncollectable. What is the bad debt expense for the period?

End Bal. in Allowance for uncollectible accounts of 19K plus write-offs of 9k less beginning balance of 12k equals 16k. (19K-12K) + 9k = 16,000 bad debt expense

If sales returns are treated as expenses, what are the effects on the financial statements?

Expenses are overstated. Revenues are overstated.

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

On Oct. 1 Light Corp. sold goods on account to Dark Corp. Light agreed to accept a 100K, 8%, 6 month interest bearing note from Dark in payment for the goods. Light has a Dec. 31 year end. The entry required on Light's books on April 1 when the note is due requires a

credit interest receivable, $2,000 ($100,000*0.08*(3/12)) = $2,000

The entry to record lending $1,000 to an employee at a rate of 6% for 3 months includes a:

credit to cash of $1,000; debit to notes receivable of $1,000

On Nov. 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000; 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a Dec. 31 year end. On Feb. 1, year 2, when the note matures, the journal entry will include a

credit to interest income, $400 (The 12% is an annual rate, and since only 1/12 of a year has been earned (year 2), interest revenue is $400 (=$40,000*0.12*(1/12))

Robert receives payment on Jan. 10, for a service provided on Jan. 1. Record the transactions

date..... DR. Cr. Cash $$$ Sales Discount $$ .........Accounts Receivable $$$$

Sully Corp. uses an income statement approach for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of sales during the year, the adjustment for estimated uncollectible accounts will require a

debit to bad debt expense for $2,000

Two enteries are required when a previously written off account is paid. These two entries include:

record the collection on the account receivable, and reinstate the account receivable.

The allowance method is a method of accounting that ____ net accounts receivable (as well as net income) for estimated bad debts.

reduces

The allowance method is a method of accounting that _______ net accounts receivable (as well as net income) for estimated bad debts.

reduces

The sales discount account is a contra _______ account. (Enter one word per blank).

revenue

Accounts receivable from sales to customers are ______ receivables.

trade

On Nov. 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000; 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on Dec. 31 at the end of the year includes a

debit interest receivable $800 (The 12% is an annual rate and since only 2/12 of a year has been earned, interest revenue is $800 (=$40,000*0.12*(2/12))

The following info. is taken from Connor corp's accounting records: Account Beg. Bal End Bal Accts Rec'v. 100K 140K Allowance for 15,000 18,000 Uncollectible During the year, Connor wrote off $17,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was a

debit to Bad Debt Expense for $20,000 ($18,000 + $17,000 - $15,000)

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a ______ discount.

sales