ACCT CH5 READING

A trade discount is recognized

by reducing the revenue amount recorded.

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

The percentage-of--credit-sales method is allowed only if it does not

differ significantly from estimates using the percentage-of-receivables method.

Flounder Corp. provided $12,000 of services on account. The entry to record this transaction would include a debit to

accounts receivable

Glasser Corp. provided $20,000 of services on account. When Glasser collects on the account, a credit is made to

accounts receivable

The allowance for uncollectible accounts is a contra account to

accounts receivable

The term net accounts receivable refers to

accounts receivable less the allowance for uncollectible accounts.

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated.

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

allowance method

The account "Allowance for Uncollectible Accounts" normally has a _____ balance.

credit

If the allowance for uncollectible accounts is 25% of year-end accounts receivable, this might indicate

credit policies are too lenient

When a business provides services to a customer, and the customer promises to pay later, this is referred to as

credit sale

The income statement approach for estimating bad debts uses a percentage of

credit sales.

A calendar-year-end company that accepts a 3-month interest-bearing note on December 1 must accrue _____ revenue on December 31.

interest

An aging schedule classifies accounts receivable based on

length of time outstanding.

Bad debt expense is reported on the:

income statement

The percentage-of-credit-sales method is also commonly referred to as the _____ _____ method.

income statement

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to

be more accurate

Accounts receivable are normally classified

in the balance sheets as an asset

Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are:

subject to inaccuracy

The average collection period is calculated as 365 divided by

the receivables turnover ratio.

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

allowance for uncollectible accounts.

Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.

future; current

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a

credit to Allowance for Uncollectible Accounts.

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will _____ net income.

have no effect on

Recording sales returns and allowances in a separate contra-revenue account helps managers:

keep track of these amounts

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) _____ _____ approach to measuring bad debts.

income statement

A customer account that is not expected to be collected is referred to as a bad debt or _____ account

uncollectible

At the end of the year, companies must record estimated contra revenues for estimated sales returns and allowances and sales discounts pertaining to

current year sales only

A _____ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low.

debit

Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

debit Allowance for Uncollectible Accounts.

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales return

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note receivable.

A high ratio of allowance for uncollectible accounts to total accounts receivable can indicate

the company extends too much credit the company's customers are high-risk

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 accounts receivable balance?

$18,000 Rationale: $20,000 - $2,000

The legal right to receive cash is valuable and represents an asset of the company.

Trade receivable

True or false: Credit sales tend to increase sales and profitability in the long-run.

True

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to

allowance for uncollectible accounts.

An account receivable is normally classified as

an asset

Sales Returns and Sales Allowances are _____ _____ revenue accounts and require a debit entry to increase the account.

contra revenue

The journal entry to record bad debt expense includes:

credit to allowance for uncollectible accounts debit to bad debt expense

Recording bad debt expense:

decreases net income increases expenses decreases assets

Companies extend credit to customers and sell goods on account because

it increases sales

The _____ ratio shows the number of times during a year that the average receivable balance is collected.

receivables turnover

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

sales returns, ,allowances, dicsounts

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

service revenue

Accounts receivable from sales to customers are ______ receivables.

trade

At the beginning of the year, Blocker Company's allowance account has a debit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too low.

Sales returns and sales allowances are what type of accounts?

contra revenue

As stewards of the company's assets.

average accounts receivable.

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

Debit Accounts Receivable. Credit Allowance for Uncollectible Accounts.

Claire provides $100 of services to customers on account with terms 2/10, n/30. The Service Revenue account is credited for $100. If the customer pays within 10 days, Claire will record which of the following?

Debit Cash $98 Credit Accounts Receivable $100 Debit Sales Discount $2

The allowance method is required by _____

GAAP

A trade discount is

a percentage reduction from list price.

The percentage-of-receivables method of estimating bad debt applies ____ to _____.

a single percentage; accounts receivable

A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.

decreases; retained

Because some of the amounts reported in financial statements are based on _____, some of the information may be inaccurate.

estimates

The difference between total accounts receivable and the allowance for uncollectible accounts is referred to as:

net accounts receivable

The financial statement effects of recording an allowance for estimated sales returns are that:

net income decreases assets decrease equity decreases

The contra revenue accounts sales returns and sales allowances

reduce revenues

The sales discount account is a contra _____ account.

revenue

The allowance method estimates

uncollectible accounts

The write-off of a specific accounts receivable ______ total assets reported on the balance sheet.

Has no effect on

Where is a note receivable reported in the balance sheet?

In current or non current assets

The direct write-off method is required for

income tax purposes

At the end of the year, Kunze Corporation estimates that $1,600 worth of merchandise sold during the current year will be returned by customers during the subsequent year. Kunze Corporation must

record the estimated returns at the end of the year.

The list price in Boyton's catalog indicates that Product A sells for $3,000, with a trade discount of 5%. Boyton sells the goods to a customer who qualifies for the trade discount. At what amount should Boyton record the sale and related account receivable?

$2,850

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

Cash

Sales to customers in which the customers pay within 30 to 60 days are referred to as

Credit Sales; Sales on Account

Adrian Corp. sells goods on account for $100,000 on May 1. 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?

Credit to Accounts Receivable. Debit to Sales Returns.

Kim Corporation sells goods to a customer on account for $1,000, terms 2/10, n/30. When the customer pays on the 20th day, Kim will record which of the following?

Debit cash $1,000

Zeiger Corporation sells goods to a customer on account for $2,000, terms 2/10, n/30. When the customer pays on the 12th day, Zeiger records which of the following?

Debit cash 2000

Joyce Corp. uses the percentage-of-receivables 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?

Debit to Allowance for Uncollectible Accounts; Credit to Accounts Receivable

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

Expenses are overstated. Revenues are overstated.

When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?

Make an adjusting entry at the end of the current period to accrue the interest earned.

Gammy Corporation provides services with a normal price of $800,000 and a trade discount of $100,000. Terms are 2/10, n/30 and the customers pay within 10 days. The net service revenue is

Rationale: $800,000 - 100,000 trade discount = $700,000 gross sales less 2% discount (.02x700,000) = $686,000.

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

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

Identify the likely disadvantages of extending credit to customers.

Uncollectible accounts Delay in collecting accounts

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable.

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

as a noncurrent asset

For a typical credit sale, the seller records revenue

at the point of delivery

A customer account that is not expected to be collected is referred to as a(n) _____ debt.

bad

The cost of estimated accounts receivable that will not be collected is referred to as _____ _____ expense.

bad debt

The estimated expense for accounts that may not be collected is referred to as

bad debt expense.

The percentage-of-receivables approach to measuring bad debt expense is referred to as _____ method.

balance sheet

Sully Corporation uses a percentage-of-credit sales method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales during the year, the adjustment for estimated uncollectible accounts will require a

debit to Bad Debt Expense for $2,000.

Abby Fashions sells a suit to a customer for $600 on account. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby Fashions grants the customer a $60 credit. Abby Fashions will record:

debit to Sales Allowances $60 credit to accounts receivable $60

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable.

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales

allowance

York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows:

equity decreases; assets decrease

At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too high.

(Face value x annual interest rate x fraction of the annual period) is the formula for

interest on a note

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

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

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible.

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

The receivables turnover ratio indicates

the number of times during a year that the average accounts receivables were collected.

Accounts receivable are typically classified as current assets because

they will be converted into cash within 1 year

The process of estimating an allowance for uncollectible accounts, writing off bad debts in the following periods, and then reestimating the allowance at the end of the period occurs:

throughout the company's life

Assume Company X is in its fifth year of operation. Analyze the following schedule. What conclusion can be drawn from the following schedule?

the target amount in allowance for uncollectible accounts is $25,500.

Fog Corporation sells $5,000 goods on account. Salaries expense was $3,000. Sales returns were $100, and sales discounts were $300. Net sales were

$4,600 Rationale: $5,000 - 100 - 300 = $4,600

James Corporation sells $1,000 goods on account. Sales returns were $40, and sales allowances were $50. Sales discounts for the period were $30. Net sales are

$880

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000 Rationale: $100,000 - $7,000

Pine Corporation provides $1,000 of services on account with terms 2/10, n/30. If the customer takes the discount and pays within 10 days, Pine will receive

$980

Relay Corporation provides services with a normal price of $105,000 and a trade discount of $5,000. Terms are 1/10, n/30 and the customers pay within 10 days. The net service revenue is

$99,000 Rationale: $105,000 - 5,000 trade discount = $100,000 gross sales less 1% discount (.01x100,000) = $99,000.

Which method is preferred for recognizing bad debts?

A balance sheet method such as percentage-of-receivables.

What are the financial statement effects of recording bad debt expense using the allowance method?

Decrease assets Increase expenses

A trade discount is a reduction from the list price, which is used to:

change prices without publishing a new catalog give quantity discounts to customers disguise real prices from competitors

The ratio that shows the approximate number of days the average accounts receivable balance is outstanding is referred to as the average _____ _____.

collection period

Trade receivable is another term for _____ receivable

accounts

Bell provides $500 of services to customers on account with terms 3/10, n/30. The Service Revenue account is credited for $500. If the customer pays within 10 days, Bell will record which of the following?

Debit Sales Discount $15

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

Income tax receivable is a ______.

nontrade receivable

Kilroy Corporation provides services to a customer for $1,000. The customer complained that there was a slight defect in the service. Kilroy granted the customer a $50 credit. Kilroy will record this adjustment to the sales price with a

debit to Sales Allowances $50.

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.

estimated; at the end of the year

During the year, Inga Corporation writes off a specific accounts receivable. Assuming that Inga Corporation uses the allowance method, what is the effect of later collecting the written-off accounts receivable on net income?

no effect

Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet?

No effect on total assets.

Receivables not expected to be collected should

not be counted in assets of the company.

The method used to estimate bad debts that may result in more accurate reporting of net income is the:

percentage-of-credit-sales method

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

A disadvantage to selling on account is

customers do not always pay.

The process of estimating uncollectible accounts

occurs throughout the company's life.

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) _____ discount.

sales

The sales discount account is classified as a(n)

contra revenue account.

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

accounts receivable

Percentage- of-receivables method Percentage- of-credit-sales method

assets are reported closer to their net receivable value better matching of revenues and expenses

Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.

contra-asset