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

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

Which of the following is the typical sequence of accounting for sales made on account using the allowance method?

Accounts Receivable are debited in the perios the revenue is recognized Bad Debit Expense is es

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

Aging of accounts receivable method

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

Which of the following statements is true?

Allowance for Doubtful Accounts is a permanent account.

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 debit balance of $1,000. After the adjustment, the ______.

Allowance for Doubtful Accounts will have a $90,000 credit balance

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.

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.

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 ______.

Bad Debt Expense = $38,000 x 0.02=$760.

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 ______.

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

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

Delayed receipts of cash Increased bad debt costs Increased wage costs

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

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

Expense recognition (matching) principle

Why is Bad Debt Expense an estimate?

GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.

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

It is collecting the principal on amounts lent earlier.

An adjusting entry to accrue for interest earned is often needed when a company has ______.

Notes Receivable

Sales on account will cause an increase in _______.

Sales Revenue on the income statement Accounts Receivable on the balance sheet

The days to collect ratio provides what kind of information?

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

In which situations does a company issue a note receivable?

The company lends money to employees or businesses. The company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest.

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

The establishment of a note

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

Net sales revenue is $720,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio.

The turnover equals 12.0 times (= $720,000/(($62,000 + $58,000)/2)).

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

Write off the uncollectible account and its corresponding allowance from the accounting records.

Which of the following is contra-asset account?

allowance for doubtful accounts

Using the allowance method, Bad Debt Expense is recorded _____.

as an estimate in the period of the related credit sales

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

assets decrease stockholders' equity to decrease

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

The correct journal entry for the collection of a note receivable includes a ______. Assume the collection of interest is recorded separately.

credit to Notes Receivable debit to Cash

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.

credit; decrease

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______.

credits

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

debit Notes Receivable and credit Cash

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

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______.

debit to Bad Debt Expense credit to Allowance for Doubtful Account

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 ______.

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

On March 1, Scents, Inc. lent $1,000 to an employee 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

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

decreases net accounts receivable

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

effectiveness in granting and collecting credit

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 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

The receivables turnover ratio gives information on how ______.

many times the company sells and collects amounts on account per year

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable

Allowance for Doubtful Accounts is a ______.

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

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______.

sales to decrease bad debt expense to decrease

Bad Debt Expense is a ______.

temporary account so its balance is closed (zeroed out) at the end of the accounting period

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write-off of a specific customer's account

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 ______.

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