BA 211 Chapter 8

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than To arrive at the desired Allowance for Doubtful Accounts balance of $1,000 (=$10,000 x 10%), only $900 (=$1,000 minus the $100 credit unadjusted balance) needs to be credited to the Allowance account since there is already a $100 credit unadjusted balance in it. Thus the entry needed is a debit to Bad Debt Expense (+E,-SE) of $900 and a credit to Allowance for Doubtful Accounts (+xA,-A) of $900. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's uncollectible credit sales. The expense is a temporary account and reports only the expense on the current period's uncollectible credit sales.

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______.

an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December A company will record interest revenue either when it receives an interest payment or reaches the end of an accounting period, whichever comes first.

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of ______.

$1,000 debit The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and is later decreased (debited) when specific accounts receivables are written off. Since the $10,000 estimated amount in the Allowance account is less than the $11,000 debited for write offs, a $1,000 unadjusted debit balance will result, i.e., more was written off than was originally allowed. This underestimate will cause Bad Debt Expense on the income statement to be $1,000 greater than the Allowance balance on the balance sheet.

Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts?

Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay. The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable because it is an estimate. Accounts Receivable cannot be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

Which of the following are contra-asset accounts?

Accumulated Depreciation and allowance for Doubtful Accounts

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______.

Allowance for Doubtful Accounts of $1,000 and Bad Debt Expense of $950 The $50 credit in the unadjusted Allowance for Doubtful Accounts needs to be adjusted to the desired $1,000 credit balance based on an aging of receivables, not $950.

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______.

Allowance for Doubtful Accounts of $2,050 credit balance and Bad Debt Expense of $2,000 This is the credit sales method and requires an adjusting entry that debits Bad Debt Expense and credits Allowance for Doubtful Accounts for $2,000 (=$100,000 x 2%). The unadjusted $50 credit balance plus the credit of $2,000 results in a $2,050 credit balance in the Allowance account.

Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method?

An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale.

When a company receives the interest payment for a note that was issued in mid-November of the prior accounting period, the entry includes a debit to ______.

Cash and credit to Interest Receivable and Interest Revenue The revenue recognition principle requires interest be recorded when earned. Thus, an adjusting entry was recorded for the interest earned in the prior period with a debit to Interest Receivable (+A) and a credit to Interest Revenue (+SE). In the current period when it receives the interest payment, it debits Cash (+A) for the entire amount and credits Interest Revenue for the amount earned in the current period with a credit to Interest Revenue (+SE) and it credits its Interest Receivable (-A) for the interest recorded as revenue in the prior period, when earned.

Failing to record bad debt expense in the same period as the related revenue violates which principle?

Expense recognition (matching) principle The expense recognition principle requires an estimated amount of bad debt expense be recorded in the same period as the related credit sales in order to match the expense with the related sale. The objective is not to overstate net income in the period the bad sales were made.

True or false: The adjusting entry to record Bad Debt Expense includes a credit to Accounts Receivable.

False The Allowance for Doubtful Accounts is credited, not Accounts Receivable. Accounts Receivable will be written off later when the specific customer is known with a debit to Allowance for Doubtful Accounts (-xA,+A) and a credit to the customer's Accounts Receivable (-A).

What are the potential drawbacks of speeding up collections of receivables?

Hounding customers to pay if their receivables are past due is time-consuming and costly and customers may get annoyed and take their business elsewhere.

What is occurring if a company is debiting Cash and crediting Notes Receivable?

It is collecting the principal on amounts lent earlier.

What effect does the adjusting entry for interest earned but not yet received have on the accounting equation?

It results in an increase in assets and stockholders' equity. The revenue recognition principle requires an adjusting entry to accrue interest earned and includes a debit to Interest Receivable (+A) and a credit to Interest Revenue (+SE).

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

Percentage of credit sales method

The days to collect ratio provides what kind of information?

That a higher number of days means a longer (worse) time for collection and the average number of days from sale on account to collection

What information is provided by the receivables turnover ratio?

That a higher ratio means faster (better) turnover and the number of times the average receivables balance is collected during the period

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 expense is recorded in the same period in order to match the expense with the related sale so as not to overstate net income in the period the bad sales were made.

What is the effect on the accounting equation if a company does not write off specific, non-paying customers' accounts receivable?

The write off of a specific customer's account debits Allowance for Doubtful Accounts (-xA,+A) and credits Accounts Receivable (-A); thus, there is no effect on total assets whether an account is written off or not. The adjusting entry, debit Bad Debt Expense (+E,-SE) and credit Allowance for Doubtful Accounts (+xA,-A), is when assets and stockholders' equity are reduced. The adjusting entry is recorded in the same period as the related credit sales in accordance with the expense recognition principle.

The direct write-off mismatches revenues with expenses because a customer's account is expensed in ______ the related credit sale.

a later accounting period than

By comparing the number of days to collect with the length of the credit policy, companies can infer that customers ______ if the days to collect is high.

are more likely to default and may be dissatisfied with the product or service

The adjusting entry to record the allowance for doubtful accounts causes total ______.

assets to decrease and stockholders' equity to decrease Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

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 In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

On February 1, Stretchers, Inc., receives $4,000 of interest of which $3,000 was generated and recorded in the prior accounting period ended December 31. The entry to record the collection of interest on February 1 includes a ______.

credit to Interest Receivable of $3,000, credit to Interest Revenue of $1,000, and debit to Cash of $4,000

ABC Corp. received a 3-month, at 8% per year, $1,500 note receivable on November 1. The adjusting entry on December 31 will include a ______.

credit to Interest Revenue of $20 Two months, November and December, of interest have been earned. Interest Revenue equals $20 (=$1,500 x 0.08/year x (2/12 year)). The time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate).

The entry to record the issuance of a note receivable is ______.

debit Notes Receivable and credit Cash

The entry to record the write-off of a specific customer's account requires a ______.

debit to Allowance for Doubtful Accounts and credit to Accounts Receivable

The allowance method is a method of accounting that ______ for estimated bad debts.

decreases net accounts receivable Net Accounts Receivable decreases because the Allowance for Doubtful Accounts, which reports the estimated bad debts likely to arise, is netted against total Accounts Receivable.

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

effectiveness in granting and collecting credit

The 2 steps required using the allowance method, are to ______.

first make an end-of-period adjustment to record the estimated bad debts and later write-off specific customer balances when they are known to be uncollectible In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount. Later when the non-paying customer is specifically identified, it will write-off that customer's accounts receivable.

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a debit balance when the amount of write offs recorded during the period is ______ the amount estimated to uncollectible in the prior accounting period.

greater than The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and decreased (debited) later when specific accounts receivables are written off. Thus, if the estimated amount is less than the amount written off, an unadjusted debit balance will result. Bad Debt Expense on the income statement will need to be more than the Allowance balance on the balance sheet to make up for the underestimate from the prior period.

removes the same amount from Allowance for Doubtful Accounts

has no effect on net income The write-off requires a debit to the Allowance (-xA,+A) account and a credit to Accounts Receivable (-A). Both of these are balance sheet accounts so the entry does not affect net income. Net income was reduced previously when the adjusting entry was recorded with a debit to Bad Debt Expense (+E,-SE) and a credit to the Allowance (+xA,-A) account.

Bad Debt Expense ______.

is an estimate and is a cost of extending credit to customers

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is ______ the amount allowed in the prior accounting period.

less than The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and is later decreased (debited) when specific accounts receivables are written off. Thus, if the estimated amount credited to the Allowance account is greater than the amount debited for write offs, an unadjusted credit balance will result. The Allowance (a permanent account) on the balance sheet is more because of the unadjusted credit balance carried forward from the prior period's uncollectible credit sales. The expense is a temporary account and reports only the expense on the current period's uncollectible credit sales.

The objectives when accounting for accounts receivable and bad debts are to ______.

match the cost of bad debts to the accounting period in which the related credit sales are made and report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect.

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable

When accounting for accounts receivable, a primary objective is to ______.

not overstate assets and stockholders' equity by the estimated amount of bad debt The expense recognition principle requires an estimated amount of bad debt expense be recorded in the same period as the related credit sales in order to match the expense with the related sale. The objective is not to overstate net income in the period the bad sales were made.

Notes receivable are used for ______.

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

Match the entry that would be recorded for the 4 key events related to issuing an interest-bearing note.

- The issuance of a note; debit Notes Receivable and credit Cash - debit Notes Receivable and credit Cash The adjusting entry to record interest owed; debit Interest Receivable and credit Interest Revenue - debit Interest Receivable and credit Interest Revenue The receipt of an interest payment; debit Cash and credit Interest Receivable - debit Cash and credit Interest Receivable The receipt of the principal payment; debit Cash and credit Notes Receivable debit Cash and credit Notes Receivable

Which method of allowing for estimated uncollectible accounts is generally more accurate?

Aging of accounts receivable method The aging of accounts receivable is more accurate in estimating the amount of uncollectibles because the estimate is based on management reviewing the age of each amount in Accounts Receivable and adjusting accordingly. The percentage of sales method simply applies a percentage to all credit sales (both collected and uncollected)

Which of the following is a permanent account whereby the ending balance of the prior accounting period equals its beginning balance of the next.

Allowance for Doubtful Accounts

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______.

Allowance for Doubtful Accounts of $1,000 and Bad Debt Expense of $950

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

The receipt of the principal payment The entry for the receipt of interest includes a debit to Cash (+A) and a credit to Interest Receivable (-A) for any interest generated the previous accounting period and a credit to Interest Revenue (+SE) for the interest earned in the current accounting period.

A _______ stuffing scenario refers to when a company increases its credit sales by selling to less financially secure customers.

channel

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a ______.

debit to Bad Debt Expense of $1,100 and credit to Allowance for Doubtful Accounts of $1,100

A company's Bad Debt Expense reports the ______.

estimated amount of this period's credit sales that customers will fail to pay In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

If the Allowance for Doubtful Accounts has a credit balance prior to recording the adjusting entry for the current period's uncollectible accounts, then the ______.

estimated amount of uncollectibles was greater than the amounts actually written off The Allowance account is credited for the estimated amount of bad debts at the end of the accounting period and later is debited for the write-offs of the actual bad receivables. Thus, there will be a credit balance in the Allowance when the estimate is greater than the actual amounts written off.

Allowance for Doubtful Accounts is a ______.

permanent account so its balance carries forward to the next accounting period

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

removes the same amount from Allowance for Doubtful Accounts

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance?

Aging of accounts receivable method This method estimates the amount of the Bad Debt Expense and then the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance.

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. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than The method used is the Percentage of Sales method whereby the expense is calculated first and then the balance in the Allowance for Doubtful Accounts is determined. The adjusting entry includes a debit to Bad Debt Expense (+E,-SE) of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts (+xA,-A). After adjustment, the Allowance will have a $1,100 credit balance (=$1,000 credit + 100 credit) on the balance sheet and Bad Debt Expense will equal $1,000 on the income statement. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's credit sales. The expense is a temporary account and reports only the expense on the current period's credit sales.

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, the ______.

Allowance for Doubtful Accounts will have a $90,000 credit balance The aging method specifies the desired ending balance in the Allowance account which is $90,000. The $1,000 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $89,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $89,000.