Chapter 8 LS: Receivables, Bad Debt Expense, and Interest Revenue

based on an aging of accounts receivables, management assigned 1% to the $100,000 of receivables 0-30 days outstanding, 5% to the $10,000 receivables 31-60 days and 20% to the $1,000 of receivables over 60 days. after making the adjusting entry the balance in the Allowance for Doubtful Accounts will equal _____

$1,700

a company lends $1,000 each to two employees at a rate of 6% on December 1. One employee is to repay the note in 3 months and the other in 6 months. At December 31, how much interest will the company accrue?

$10 each employee owes the company for one month's interest or 1/12 of the 6% annual rate. interest = $2,000 principal x 6% interest rate x 1/12 year = $10. the maturity dates of 3 and 6 months doesn't affect the amount of interest generated per month. it does affect how much interest the company will earn at maturity which is $1,000 x 6% x 3/12 from one employee and $1,000 x 6% x 6/12 from the other

Accounts Receivable has a $2,300 balance, and the Allowance for Doubtful Accounts has a $200 credit balance. an $80 account receivable is written-off. net receivables (net realizable value) after the write-off equals _____

$2,100 net receivables = ($2,300 - $80) - ($200 - $80) = $2,100

in its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals _____.

$760

the allowance method requires that _____

- Allowance for Doubtful Accounts be netted against Accounts Receivable - Bad Debt Expense be recorded in the same period as the related credit sales

match each account with the proper description

- Notes Receivable: the principal amount - Interest Receivable: the amount of interest earned but not yet collected - Interest Revenue: the amount of interest earned

which of the following are contra-asset accounts?

- accumulated depreciation - allowance for doubtful accounts

the entry to record the write-off of a specific customer's account requires _____

- credit to Accounts Receivable - debit to Allowance for Doubtful Accounts

using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. the Allowance for Doubtful Accounts has a $100 unadjusted credit balance. the adjusting entry to record estimated bad debts includes a _____

- credit to Allowance for Doubtful Accounts of $900 - debit to Bad Debt Expense of $900

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

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

the correct journal entry for the collection of a note receivable includes a _____

- debit to Cash - credit to Notes Receivable

the entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a _____

- debit to Notes Receivable of $1,000 - credit to Cash of $1,000

on March 1, Scents Inc. lent $1,000 to an employment at a rate of 6% for 3 months. Scents' entry to record the loan of $1,000 to its employee includes a _____.

- debit to Notes Receivable of $1,000 - credit to Cash of $1,000 interest is not generated or recorded until time has passed

the journal entry to record $5.6 million in sales on account includes a _____.

- debit to accounts receivable of $5.6 million - credit to sales revenue of $5.6 million

notes receivable are used for _____

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

the 2 steps required using the allowance method, are to _____

- first make an end-of-period adjustment to record the estimated bad debts - later write-off specific customer balances when they are known to be uncollectible

which of the following are advantages to extending credit to customers?

- increased sales - increased demand

which of the following are disadvantages to extending credit to customers?

- increased wage costs - increased bad debt costs - delayed receipts of cash

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 - report accounts receivable net of the amount the company doesn't expect to collect (i.e., at the net realizable value)

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

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

which of the following are advantages of using national credit cards?

- reduction of bad debts expense - avoid lengthy cash collection periods

when recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. the reason is _____

- the amounts are estimates and no one knows which particular customers will not pay - the company would lose track of which customers still owe money

the days to collect ratio provides what kind of information

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

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 - the adjusting entry to record interest owed: debit Interest Receivable and credit Interest Revenue - the receipt of an interest payment: debit Cash and credit Interest Receivable - the receipt of the principal payment: debit Cash and credit Notes Receivable

which of the following is the typical sequence of accounting for sales made on account using the allowance method? place in order of occurrence from top to bottom

1. Accounts Receivable are debited in the period the revenue is recognized 2. Bad Debt Expense is estimated and recorded with an adjusting entry 3. specific customer balances are written off

rank companies A-C based on how favorable their receivables turnover ratio is (from most favorable on top to the least favorable)

1. Company B: 5.6 times 2. Company A: 3.4 times 3. Company C: 2.4 times

place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually

1. debit notes receivable and credit cash 2. debit interest receivable and credit interest revenue 3. debit cash and credit interest receivable 4. debit cash and credit notes receivable. interest revenue, and interest receivable

the days to collect ratio is computed as _____

365 divided by the Receivable Turnover Ratio

_____ Receivable arise from making sales to customers on account and are non-interest bearing. _____ Receivable are formal written contracts that are interest bearing

Accounts; Notes

the adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to _____ _____ _____ _____

Allowance for Doubtful Accounts

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

assuming the allowance method, the entry to record the write-off of a specific, non-paying customer is recorded with a debit to _____

Allowance for Doubtful Accounts and credit to Accounts Receivable

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

an adjusting entry to accrue for interest earned is often needed when a company has _____

Notes Receivable

when will a bankrupt customer's accounts receivable be eliminated? when the company records _____

a write off

removing an uncollectible account and its corresponding allowance from the accounting records is called _____

a write-off

a(n) ____ of accounts receivables method is based on the amount of days the receivables have been unpaid. when determining the desired amount of the Allowance for Doubtful Accounts, the older receivables are assigned a higher percent than new ones.

aging

a scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest _____

channel stuffing

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

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

debit Notes Receivable and credit Cash

ABC Corp. received a 2-month, 8% per year, $1,500 note receivable on December 1. The adjusting entry on December 31 will include a _____

debit to Interest Receivable of $10 $1,500 x 0.08 x (1/12) = $10. only 1/12 of the annual rate has been generated since December 1

the Allowance for Doubtful Accounts, a contra-asset account, is _____ when specific uncollectible accounts are written-off

debited

the allowance method is a method of accounting that _____ for estimated bad debts

decreases net accounts receivable

a company's Bad Debt Expense reports the _____.

estimated amount of this period's credit sales that customers will fail to pay

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 for Doubtful Accounts T-account will have the _____ on the credit side

estimated bad debts from the adjusting entry

percentage of credit sales

estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

aging of accounts receivable

estimates the allowance for doubtful accounts based on the age of each account receivable

the direct write-off method is not allowed under GAAP because it violates the _____

expense recognition (matching) principle

true or false: Allowance for Doubtful Accounts is used for Accounts Receivable but not Notes Receivable

false Notes Receivable may not all be collectible, and thus an allowance for uncollectible amounts should be estimated and recorded similar to the accounting for uncollectible 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

when the allowance method is used, the entry to record the write-off of an uncollectible account _____

has no effect on net income

a subsidiary account _____

is kept for each customer's accounts receivable and the total of all customers' accounts receivable is reported on the balance sheet

why would a company debit Interest Receivable?

it generated interest on its notes receivable which will be collected in a later accounting period

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

the employee who records the entry to write off uncollectible accounts should _____

not be the same person who receives collections from customers

collection of a previously written-off account is called a(n) _____

recovery

assume ABC Corp. needs to speed up its cash collections from customers and decides to enter a factoring agreement. assume ABC enters this type of agreement regularly. how should the factoring fee be reported the income statement?

sales expense

what is the effect of a write-off of a specific customer's account on net receivables on the balance sheet

the net receivable balance is the same

what is the effect of a write-off of a specific customer's account on net receivables on the balance sheet?

the net receivable balance is the same

which of the following is recorded with a debit to Cash and a credit to Interest Receivable?

the receipt of an interest payment for interest previously recorded

what effect does the collection of a note receivable, excluding interest, have on the accounting equation?

total assets remain the same

true or false: to ensure bad debt expense and the allowance for doubtful accounts do not become materially misstated over time, management will revise overestimates of prior period by lowering estimates in the current period

true if the Allowance for Doubtful Accounts has an exceeding large credit card balance because more was estimated to be uncollectible than was actually written off, management will lower its estimates in the current period

true or false: converting long-outstanding accounts receivable into new notes receivable to reduce bad debt expense is unethical

true intentionally understating bad debt expense by reclassifying an overdue account receivable to a new note receivable is unethical