ACCTG 101 - Chapter 5 - Smart learning

Albert Corp. received a 2-month, 8%, $1,500 note receivable on December 1. The adjustment for interest earned by December 31 will include a:

debit to Interest Receivable of $10 (Reason: Interest is stated at an ANNUAL rate. $1,500 x 0.08 x (1/12)=$10. Only 1/12 of the 8% annual rate has been earned since December 1.)

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

The direct write-off method is required for

income tax purposes

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

sales return

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

Bad debt expense is reported on the --------- and is classified as an operating expense.

income statement

The income statement method is another commonly used term to refer to the

percentage-of-credit sales method.

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

be more accurate

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

percentage-of-credit-sales method

Which of the following items are classified as receivables?

- Amounts owed by customers - Amounts loaned and expected to be repaid - Tax refund claims

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

- Decrease assets - Increase expenses

"Net credit sales" refers to credit sales net of:

- discounts - allowances - returns

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 (Reason: Sales minus sales discounts, returns, and allowances equals net sales. $1,000 - ($40 + $50 + $30) = $880.)

Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.

Cash; Accounts Receivable

What is the transaction that required the following entry?

Collect on interest-bearing note receivable.

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000.

Mark records a journal entry with a debit to Bad debt Expense and a credit to Accounts Receivable. Mark is utilizing the:

Direct write-off method

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

What is the formula for the receivables turnover ratio?

Net credit sales divided by average accounts receivable (net).

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period

Sales discount

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

The normal balance of notes receivable is:

a debit

Trade receivable is another term for -----receivable.

accounts

An account receivable is normally classified as

an asset.

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

Accounts receivable should be classified as a(n)

asset

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

bad debt expense.

With the direct write-off method, the journal entry to write-off an uncollectible account includes a debit to _____ and a credit to _____.

bad debt expense; accounts receivable

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

balance sheet

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

credit

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.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip initially recorded this as an account receivable but it later became apparent Daffodil could not pay quickly so Tulip required Daffodil to sign $40,000, 10%, 3-month interest-bearing note. The entry required on Tulip's books when Daffodil signs the note would include a

debit to Notes Receivable, $40,000.

The receivables turnover ratio and the average collection period provide information about a company's

effectiveness in managing receivables

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

estimates

The formula for calculating interest on a note is

face value x annual rate x fraction of the annual period

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

future; current

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

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

income statement

A potential disadvantage of the allowance method is that it:

may be used to manage earnings

Receivables not expected to be collected should

not be counted in assets of the company.

A(n) ----- receivable typically yields interest revenue and possesses a fairly high probability of collectibility

note

The contra revenue accounts sales returns and sales allowances

reduce revenues.

The sales discount account is a contra ------ account.

revenue

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

uncollectible

The allowance method estimates

uncollectible accounts

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

credit policies are too lenient

Which method of accounting requires recognizing bad debt expense when it is determined that the customer cannot pay?

Direct write-off method

A company that tries to increase current-year net income by manipulating bad debt expense could achieve this objective by intentionally

underestimating uncollectible accounts

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.

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)

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

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

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.

A(n) _____ receivable is an informal credit arrangement with trade customers, whereas a(n) _______ receivable is a formal signed credit arrangement between a creditor and a debtor.

account, note

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

bad

ABC Corp. received a 3-month, 8%, $1,500 note receivable on November 1. The adjustment for interest earned by December 31 will include a:

credit to Interest Revenue of $20 (Reason: $1,500 x 0.08 x (2/12) = $20; the time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate).)

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.

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

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

subject to inaccuracy

Sales returns and sales allowances are what type of accounts

Contra revenue

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

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

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.

The amount of net credit sales is reported on the ___________

income statement

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 total assets?

no effect

Accounts receivable are typically classified as current assets because

they will be converted into cash within 1 year

Companies extend credit to customers and sell goods on account because

it increases sales

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end. The entry required on Light's books for interest on April 1 when the note is due requires.

- debit to cash $4,000 - credit to interest revenue, $2,000 - credit to interest receivable, $2,000. (Reason: Interest rates are always stated at an annual rate. On December 31st, the company would have accrued interest receivable of $2,000. It will be collected when the note is due along with the additional interest from Jan 1 - April 1. $100,000*0.08*(3/12))

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

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

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

- equity decreases - net income decreases - assets decrease

Which of the following may be the result of extending payment periods?

- increased gross sales - greater required investment in receivables

Recording bad debt expense:

- increases expenses - decreases assets - decreases net income

What comparative advantages do notes receivables possess compared to other receivables?

- interest-bearing - higher likelihood of collectibility

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

The allowance method is required by -----

GAAP

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.

A high receivables turnover ratio is a sign of a company's:

effectiveness of credit sales and collection policies

On March 5, Oak Corp. provided services on account to Pine. Oak initially recorded this as an account receivable but it later became apparent Pine could not pay quickly so Oak required Pine to sign a $100,000, 12%, 2-month interest-bearing note. The journal entry required by Oak when Pine signs the note includes

Debit Notes Receivable $100,000; credit Accounts Receivable $100,000.

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.

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

Has no effect on

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable.

A trade discount is

a percentage reduction from list price.

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.

On November 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 December 31 year-end. On February 1, year 2, when the note matures, the journal entry will include a

credit to interest revenue, $400. (Reason: 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 x 0.12 x (1/12)))

Income tax receivable is a ______.

nontrade receivable

On November 1, year 1, ABC, Inc., received a 3-month, 8%, $1,500 note receivable with interest and principal to be collected on February 1 of year 2. What is the amount of interest revenue that should be recorded for year 1?

$20 (Reason: The 8% is an annual rate and since only 2/12 of a year has been earned, interest revenue is $20 (=$1,500 x 0.08 x (2/12)). Nov and Dec is 2/12 of a year.)

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)

On Sept 1, year 1, Parnell Inc. received a 6-month, 6%, $2,000 note receivable with interest and principal to be collected on March 1 of year 2. What is the amount of interest revenue that should be recorded for year 1?

$40 (Reason: The 6% is an annual rate and since only 4/12 of the year has been earned, interest revenue is $40 (=$2,000 x .06 x (4/12)). Sept, Oct, Nov, Dec is 4/12 of a year.)

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.)

Match each term with its definition. Instructions: - Account receivable: - Note receivable:

- Account receivable: Informal credit agreement with trade customers - Note receivable: Formal credit arrangement between borrower and lender

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? (Select all that apply.)

- Credit to Accounts Receivable. - Debit to Sales Returns.

Prague Company has sales of $1,000,000 each year, but the average collection period has increased from 45 days to 65 days. What are the most likely reasons for the change in average collection period?

- Customers are not paying in a timely manner. - The company has become more lax in its credit policies and is extending credit terms to maintain customers.

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.

Identify the likely disadvantages of extending credit to customers.

- Delay in collecting accounts - Uncollectible accounts

Which of the following may be disadvantages of extending credit to customers and relaxing collection policies?

- Increased bad debt - Requires higher investment in receivables

Which information regarding the receivables turnover ratio is true?

- It provides an indication of a company's efficiency in collecting receivables. - It shows the number of times during a period that the average accounts receivable balance is collected.

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 and Sales Allowances are ------ - ------ accounts and require a debit entry to increase the account.

- contra - revenue

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 the following: (Select all that apply.)

- credit to Cash - debit to Sales Returns

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:

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

The journal entry to record bad debt expense includes: (Select all that apply.)

- credit to allowance for uncollectible accounts - debit to bad debt expense

On December 1, Melinda Corp. performed services on account to Norman. Melinda agreed to accept a 4-month interest-bearing note from Norman in payment for the services. Melinda has a December 31 year-end. On April 1, year 2, when the note matures, Melinda's journal entry will include

- credit to interest receivable - debit to cash - credit to interest revenue

On November 1, Pepper Corp. sold goods on account to Salt. Pepper agreed to accept a 3-month interest-bearing note from Salt in payment for the goods. Pepper has a December 31 year-end. On February 1, year 2, when the note matures, Pepper's journal entry will include credits to

- notes receivable - interest revenue - interest receivable

The direct write-off method is normally not permitted for U.S. GAAP reporting because if related credit sales occurred in the prior year, it:

- overstates net income in the prior year - overstates assets in the prior year

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

- receivable turnover ratio - average collection period

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

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

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 -Debit Sales Discount $2 -Credit Account Receivable $100

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

-Sales allowances -Sales returns -Sales discounts

Which of the following are classified as receivables?

-interest due from loans to customers -loans by a company to other entities

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 $ (Reason: $20,000 - $2,000)

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 $

Payment for credit sales are typically due in ---- to ---- days.

30 , 60

Credit sales typically include an informal credit arrangement requiring payment within ______ days.

30 to 60

The formula for average collection period is

365 divided by the receivables turnover ratio.

Compute the receivables turnover ratio using the following information: Net credit sales is $200,000 for year 2. Total assets at the end of years 1 and 2 were $800,000 and $1,200,000, respectively. Accounts receivable at the end of years 1 and 2 were $40,000 and $60,000, respectively.

4

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days (Reason: 365/receivables turnover = 40.6 days)

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

Which method is preferred for recognizing bad debts?

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

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as

Accounts Receivables

Which method of accounting requires estimating bad debt expense and recording the expense in the same period as the related revenue?

Allowance method

When an account previously written off is collected in full, which is 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.

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

a single percentage; accounts receivable

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

account receivable

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

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

accounts receivable.

The average accounts receivable balance is calculated by:

adding last year's and this year's ending balances of accounts receivable and dividing the sum by 2

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ----- method of accounts receivable.

aging

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.

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

allowance for uncollectible accounts.

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

allowance method

The direct write-off method is not normally an acceptable method under GAAP because it fails to report _____.

assets and expenses correctly

With the allowance method, bad debt expense is recorded

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

For a typical credit sale, the seller records revenue

at the point of delivery.

Adding last year's and this year's ending balances in accounts receivable and dividing the sum by two will calculate the:

average accounts receivable

As stewards of the company's assets.

average accounts receivable

The formula to compute the receivables turnover ratio is net credit sales divided by

average accounts receivable.

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

bad debt

A trade discount is recognized

by reducing the revenue amount recorded.

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

cash

The receivables turnover ratio offers an indication of how quickly a company is able to

collect its accounts receivable.

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

collection period

The sales discount account is classified as a(n)

contra revenue account.

The Sales Returns and Sales Allowances accounts are classified as

contra revenue accounts

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

contra-asset

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 disadvantage to selling on account is

customers do not always pay.

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

debit

On November 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 December 31, at the end of the year includes a

debit Interest Receivable, $800. (Reason: 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)))

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

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

decreases; retained

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.

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.

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

estimated; at the end of the year

Accounts receivable are normally classified

in the balance sheet as assets.

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

interest

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

interest on a note.

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

keep track of the amounts

An aging schedule classifies accounts receivable based on

length of time outstanding.

Total revenues less discounts, returns, and allowances are referred to as -----revenues.

net

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

net accounts receivable

Another term sometimes used for accounts receivable is

trade receivable

Jordan Corporation settles an account receivable from London Company by accepting a six-month interest bearing note receivable with an interest rate of 8%. The effect on Jordan's financial statements the date the note is accepted is

no change in current assets.

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

not affect

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

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

note receivable.

The process of estimating uncollectible accounts

occurs throughout the company's life.

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

receivables turnover

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 sales discount account is a contra _____ account.

revenue

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

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

sales return

Match each description with the correct term. sales return sales allowance

sales return: a customer returns merchandise purchased during the month and receives a refund of the full sales price sales allowance: a customer receives partial refund of the sales prices after the customer discovers a flaw in the merchandise. The customer keeps the murchandise

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

service revenue.

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible.

The receivables turnover ratio indicates

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

The average collection period is an estimate of

the receivables turnover ratio.

The average collection period is calculated as 365 divided by

the receivables turnover ratio.

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.

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

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

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.

Klaussen Corporation settles an account receivable from Milton Company by accepting a two-year interest bearing note receivable with an interest rate of 8%. The effect on Klaussen's financial statements is

- an increase in long-term assets - a decrease in current assets

The income statement approach for estimating bad debts focuses on

current year's credit sales.

Accounts receivable from sales to customers are ______ receivables.

trade

Match the methods for estimating bad debts with their financial statement focus. Instructions - Percentage- of-receivables method: - Percentage- of-credit-sales method:

- Percentage- of-receivables method: assets are reported closer to their net receivable value - Percentage- of-credit-sales method: better matching of revenues and expenses

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

- Revenues are overstated. - Expenses are overstated.

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

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

credit

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

Notes receivable normally has a(n) _____ balance because it is classified as a(n) _____

debit asset

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

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

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

-sales on account-credit sales

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: (Select all that apply.)

- assets decrease - equity decrease

Management's ability to collect cash from customers in a timely manner can be evaluated using these ratios:

- average collection period - receivable turnover ratio

On October 1, Light Corp. provided services on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?

Debit Interest Receivable $2,000; credit Interest Income $2,000. (Reason: The 8% is an annual rate and since only 3/12 of a year has been earned, interest revenue is $2,000 (=$100,000 x 0.08 x (3/12)))