(Complete) Chapter 05: Receivables and Sales
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 ($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
During its first year of operations, Ellison, Inc. bills customers $18,000 for the services it provided. At the end of the year, $6,000 remains due from customers. The company's credit manager estimates that 10% of the total year-end accounts receivable will not be collected. The company's estimate of uncollectible accounts is:
$600
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 of the following may be disadvantages of extending credit to customers and relaxing collection policies? -Requires higher investment in receivables -Decreased sales revenue -Lower overall reputation -Increased bad debt
- Increased bad debt - Requires higher investment in receivables
what is a Contra revenue account?
An account with a balance that is opposite, or "contra," to that of its related revenue account.
Flounder Corp. sold $12,000 of services on account. When Flounder collects on the account, the transaction will include a debit to
Cash
What are Nontrade receivable?
Receivables that originate from sources other than customers.
True or false In the long term, credit sales should benefit the seller by increasing profitability of the company.
True
Trade discounts represent:
a reduction in the listed price of a good or service.
The receivables turnover ratio offers an indication of how quickly a company is able to
collect its accounts receivable.
Sales Returns and Sales Allowances are _______-________ accounts and require a debit entry to increase the account.
contra revenue
According to the allowance method, writing off an account receivable will include a:
credit to Accounts Receivable
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.
A disadvantage to selling on account is
customers do not always pay.
On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:
debit to Sales Returns
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.
Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.
estimated; at the end of the year
Income tax receivable is a ______.
nontrade receivable
Receivables not expected to be collected should
not be counted in assets of the company.
The reason why accounts receivable account is an asset is because the Right to _______ _______ from a customer is a Valuable resource for the company.
receive cash
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 contra revenue accounts sales returns and sales allowances _______ revenues
reduce/ decrease
The extent to which the previous year's ending balance of Allowance for Uncollectible accounts differs from the current year's actual amount of uncollectible accounts affects
the year-end adjusting entry
Barnes Books allows for possible bad debts. On May 7, Barnes writes off a customer account of $5,300. On September 9, the customer unexpectedly pays the $5,300 balance. Record the cash collection on September 9.
you need to do two entries. 1. Debit accounts receivable 5300, and Credit allowance for uncollectable amounts 5300. The first entry reverses a portion of the previous entry that the customer made on May 7 to write off the account. 2.Debit Cash 5300 (he paid unexpectedly), and Credit Accounts receivable 5300 (he doesn't owe anymore). The second entry records the collection of the account receivable.
The account "Allowance for Uncollectible Accounts" is classified as
a contra asset to accounts receivable.
The Sales Returns and Sales Allowances accounts are classified as
contra revenue accounts.
When a customer returns a product for a refund, in which account is the entry recorded?
sales return
When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n __________ ___________.
sales return
define sales discount
Reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time.
What is intended to provide incentive to the customer for quick payment?
Sales discount
If the company expects to receive the cash within one year from the date of the balance sheet, it classifies the accounts receivable as a ________ Asset.
Current asset
A high ratio of allowance for uncollectible accounts to total accounts receivable can indicate: O the company extends too much credit O the company's customers are high-risk O the company should extend additional credit O stringent credit policies
- the company's customers are high-risk - the company extends too much credit
If sales returns are incorrectly treated as expenses, what are the effects on the financial statements?
-Expenses are overstated -Revenues are overstated
The normal balance of notes receivable is:
a debit
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.
Account(s) with a normal credit balance include:
Allowance for Uncollectible Accounts, Sales Revenue
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
When receivables are accompanied by formal credit arrangements made with written debt instruments (or notes), they are referred to as _______ _________.
Notes receivable
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 Reason: $800,000 - 100,000 trade discount = $700,000 gross sales less 2% discount (.02x700,000) = $686,000.
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.
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
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. Reason: $105,000 - 5,000 trade discount = $100,000 gross sales less 1% discount (.01x100,000) = $99,000.
Two important ratios that help in understanding a company's effectiveness in managing receivables are the: -receivables profit margin -receivable turnover ratio -average collection period -gross receivable ratio
- Average collection period - Receivable turnover ratio
What are the financial statement effects of recording bad debt expense using the allowance method? O increase expenses O Decrease assets O increase assets O increase revenues O Decrease expenses
- Decrease assets - Increase expenses
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: O debit to Accounts Receivable $60 O credit to cash $60 O debit to Sales Allowances $60 O credit to accounts receivable $60 O credit to Sales Allowances $60 O debit to Cash $60
- credit to accounts receivable $60 - debit to Sales Allowances $60
Which of the following may be the result of extending payment periods? -greater required investment in receivables -lower gross sales -lower cost of goods sold -increased gross sales
- increased gross sales - greater required investment in receivables
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? O Credit Cash $100 O Debit Cash $100 O Debit Sales Discount $2 O Credit Accounts Receivable $100 O Debit Cash $98
-Debit Sales Discount $2 -Credit Accounts Receivable $100 -Debit Cash $98
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? -Credit to Accounts Receivable -Credit Allowance for Uncollectible Accounts -Debit Bad Debt Expense -Debit to Allowance for Uncollectible Accounts
-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? O if payment is not made in 10 days, the net amount is due in 30 days. O The customer can take 10% discount if paid in 30 days. O The customer may take a 2% discount off the price if paid within 10 days. O The customer may take a 10% discount if paid within 2 days.
-If the discount is not taken in 10 days, the net amount is due in 30 days. -The customer may take a 2% discount off the price if paid with 10 days.
The two conditions that must exist for a sale and the related receivable to be recognized are O cash is received from the sale. O collection from the customer is probable. O the company has provided goods or services to the customer. O the product must be delivered in 60 days.
-collection from the customer is probable. -the company has provided goods or services to the customer.
The journal entry to record bad debt expense includes: O debit to allowance for uncollectible accounts O debit to bad debt expense O credit to bad debt expense O credit to allowance for uncollectible accounts
-debit to bad debt expense -credit to allowance for uncollectible accounts
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? O Debit to Sales Returns. O Credit to Allowance for Sales Returns. O Credit to Accounts Receivable. O Debit to Sales Expense.
-debit to sales returns, -credit to accounts receivable
Recording bad debt expense: O decreases expenses O increases net income O decreases net income O increases assets O decreases assets O increases expenses
-decreases net income -decreases assets -increases expenses
Williamson Distributors separates its accounts receivable into three age groups for purposes of estimating the percentage of uncollectible accounts. 1. Accounts not yet due = $22,000; estimated uncollectible = 5%. 2. Accounts 1-30 days past due = $9,200; estimated uncollectible = 20%. 3. Accounts more than 30 days past due = $3,200; estimated uncollectible = 30%. *Compute the total estimated uncollectible accounts.
1.Not yet due: (22,000 X 0.05%) = 1,100 1-30 days past due: (9,200 X 0.20%) = 1,840 30+ days past due: (3,200 X 0.30%) = 960Total: 3,900
A company will debit ___________ when recording a credit sale.
Accounts Receivable
The Giles Agency offers a 12% trade discount when providing advertising services of $1,000 or more to its customers. Audrey's Antiques decides to purchase advertising services of $1,900 (not including the trade discount), while Michael's Motors purchases only $540 of advertising. Both services are provided on account. Record both transactions for The Giles Agency, accounting for any trade discounts
Audrey's Antiques: Accounts Receivable 1,672 Service Revenue 1,672 Michael's Motors: Accounts Receivable 540 service Revenue 540
What is the Aging method:
Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts.
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. -Debit Bad Debt Expense. -Credit Allowance for Uncollectible Accounts. -Credit Accounts Receivable.
Debit Accounts Receivable.; Credit Allowance for Uncollectible Accounts.
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? O Credit cash $980 O Credit cash $1,000 O Debit cash $980 O Debit cash $1,000
Debit Cash for $1,000 Reason: The customer must pay the full amount if paid after 10 days.
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))
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.
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.
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...
Debit Sales Discount $15
1. Trade discounts. 2. Sales returns. 3. Sales allowances 4. Sales discounts These are transactions that reduce the amount of cash the company is ______ to_____ from its customers.
Entitled to receive
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
The allowance method is required by
GAAP
Where do we record sales discounts?
In a contra revenue account
Where do we record the Sales allowance?
In a contra revenue account- Sales Allowance
A high proportion of returns could be an indication of...
Inventory problems It is Important to keep track of Sales Revenue and Sales Returns in order to identify such issues.
What is the upside of extending credit to customers?
It boosts sales by allowing customers the ability to purchase on account and pay cash later.
What is the Percentage-of-receivables method:
Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected.
what is the Allowance method?
Method of reporting accounts receivable for the net amount expected to be collected.
What is the formula for the receivables turnover ratio?
Net credit sales divided by average accounts receivable (net).
Below are amounts (in millions) from three companies' annual reports. Beginning Accounts; Receivable Ending Accounts; Receivable Net Sales WalCo $1,635; $2,582; $304,427 TarMart 5,266; 5,794; 49,878 CostGet 449; 485; 50,963 Calculate the receivables turnover ratio and the average collection period for WalCo, TarMart and CostGet.
Net sales ÷ Average accounts receivable = Receivables turnover ratio WalCo $304,427 $2,108.5 144.4 times TarMart $49,878 $5,530.0 9.0 times CostGet $50,963 $467.0 109.1 times Average Collection Period 365 ÷ Receivables turnover ratio = Average collection period WalCo 365 144.4 2.5 days TarMart 365 9.0 40.6 days CostGet 365 109.1 3.3 days
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
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.
Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees are all examples of_______ ________.
Nontrade receivables
What is the downside of extending credit to customer?
Not all customers will pay fully on their accounts.
Define sales allowance
Seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's good or service.
What does a credit balance of allowance for uncollectible accounts before adjustment indicate?
That the balance of allowance at the beginning of the year (or end of last year) may have been too high
What does a debit balance of allowance for uncollectible accounts before adjustment indicate?
That the balance of the allowance account at the beginning of the year was too low.
Companies are required to estimate future uncollectible accounts and report those estimates in the current year under What method?
The Allowance method.
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?
The company has become more lax in its credit policies and is extending credit terms to maintain customers. Customers are not paying in a timely manner.
Define Bad debt expense:
The cost of estimated future bad debts that is reported as an expense in the current year's income statement.
Net accounts receivable:
The difference between total accounts receivable and the allowance for uncollectible accounts.
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
Why do we use a Contra revenue account?
To keep record of the total revenue recognized separate from the reduction due to subsequent sales return.
Kelly's Jewelry has the following transactions during the year: total jewelry sales = $590,000; sales discounts = $12,000; sales returns = $34,000; sales allowances = $14,000. In addition, at the end of the year the company estimates the following transactions associated with jewelry sales in the current year will occur next year: sales discounts = $1,200; sales returns = $4,080; sales allowances = $1,870. Compute net sales.
Total sales: 590,00 Less: sales discounts (13,200) Less: sales returns (38,080) Less: Sales allowances (15,870) Net sales: 522,850
_________discounts are typically used to provide incentives to larger customers or consumer groups to purchase from the company
Trade
What is the difference between Trade discount and Sales discount?
Trade discount represents a deduction in the selling price of a good or service, but a sales discount represents a reduction in the amount to be received from a credit customer.
_______ ________ also can be a way to change prices without publishing a new price list or to disguise real prices from competitors.
Trade discounts
What is Credit Sales?
Transfer of goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.
True or false: Credit sales tend to increase sales and profitability in the long-run.
True
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
Along with recording contra revenues during the year, companies have to have ________ entries at the end of the year.
adjusting
The ______ method recognizes that the longer accounts are past due, the less likely they are to be collected.
aging
The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the _____ method of accounts receivable.
aging
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the _______ method
allowance
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.
The formula to compute the receivables turnover ratio is net credit sales divided by
average accounts receivable.
On September 1, Year 1, Sigma Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, Year 2, the maturity date, will involve all of the following except a _____.
credit to Interest Revenue for $4,500 *The entry will include a debit to Cash for $104,500, a credit to Notes Receivable for $100,000, a credit to Interest Receivable for $3,000 ($100,000 × 9% × [4/12]), and a credit to Interest Revenue for $1,500 ($100,000 × 9% × [2/12]).
On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a: -debit to Sales Discounts -credit to Accounts Receivable -credit to Sales Allowances -debit to Sales Revenue
credit to accounts receivable
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))
A(n) _____ Blank 1Blank 1 debit , Correct Unavailable 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.
On January 1, Year 1, Boyd Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. To record acceptance of the note, the company will record a:
debit to Notes Receivable for $10,000
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.
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 O credit to Sales Allowances $50. O debit to Accounts Receivable $50. O debit to Cash $50. O debit to Sales Allowances $50.
debit to Sales Allowances $50.
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.
Customers' bad debts are very different from other transactions because the allowance method requires companies to account for....
events that have not yet occurred but that are likely to occur.
The seller makes it more convenient for the buyer to purchase goods and services. This is a benefit of_______ _______.
extending credit
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
The write-off of a specific accounts receivable ______ total assets reported on the balance sheet.
has no effect on
When the allowance method is used, the write-off of an uncollectible account:
has no effect on net income
Under the allowance method, the write-off of accounts receivable:
has no effect on total assets or net income.
What comparative advantages do notes receivables possess compared to other receivables? (Select all that apply.) -guarantees collectability -higher likelihood of collectability -interest-bearing -increases sales
higher likelihood of collectability interest-bearing
Accounts receivable are normally classified
in the balance sheet as assets
Recording sales returns and allowances in a separate contra-revenue account helps managers:
keep track of the amounts
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
Writing off a customer's account as uncollectible reduces the balance of accounts receivable but also reduces the contra asset—allowance for uncollectible accounts! The net effect is that there is __ ______ in the net receivable (accounts receivable less the allowance) or in total assets.
no change
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(n) ______ receivable typically yields interest revenue and possesses a fairly high probability of collectability.
notes
The _____ ratio shows the number of times during a year that the average receivable balance is collected.
receivables turnover
"Net credit sales" refers to credit sales net of: -returns -bad debt -discounts -allowances
returns, discounts, allowances
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
A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:
sales discounts for $24
Sales to customers in which the customers pay within 30 to 60 days are referred to as O sales on account. O nonaccrued sales. O credit sales. O deferred sales.
sales on account. credit sales.
Glasser Corp. provided $20,000 of services on account. The account that should be credited is
service revenue
At the end of Year 1, Fulton Corporation estimates uncollectible accounts to be $10,000. Actual bad debts during Year 2 totaled $12,000. This indicates that management's estimate of uncollectible accounts in Year 1 was:
too low.
The allowance method estimates
uncollectible accounts.
A customer account that is not expected to be collected is referred to as a(n) ________ debt.
uncollectible/ bad
Net Revenue is
A company's total revenues less any discounts, returns, and allowances.
What is an invoice?
A source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms.
Bad debt expense is reported on the:
income statement
The amount of net credit sales is reported on the ____ _____.
income statement
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 a(n) ______ in long-term assets and a(n) _____ in current assets.
increase; decrease
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.
On September 1, Year 1, Dallas Corporation accepts a $30,000 six-month, 12 percent promissory note from one of its clients. The year-end adjustment to accrue interest revenue on December 31, Year 1 will include a _____.
$1,200 credit to Interest Revenue
Sampson Company creates the following accounts receivable aging report at the end of the year: The balance of the Allowance for Uncollectible Accounts before adjustment is $5 million (credit). Use the information above to calculate the estimated ending balance in the Allowance for Uncollectible Accounts.
$16 million
On January 1, Year 1, Alpha Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?
$225
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. $30
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 Reason: $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.
Beta Corporation wrote off $100,000 due from a specific client in March. However, this client was able to make a partial payment of $15,000 in June. Recording this cash collection will involve all of the following accounts except:
Bad Debt Expense
At the end of the first year of operations, Mayberry Advertising had accounts receivable of $21,400. Management of the company estimates that 11% of the accounts will not be collected. What adjustment would Mayberry Advertising record for Allowance for Uncollectible Accounts?
Bad debt expense 2,354 Allowance for uncollectible accounts 2,354
At the end of the year, Mercy Cosmetics' balance of Allowance for Uncollectible Accounts is $530 (credit) before adjustment. The balance of Accounts Receivable is $21,500. The company estimates that 15% of accounts will not be collected over the next year. What adjustment would Mercy Cosmetics record for Allowance for Uncollectible Accounts?
Bad debt expense 2,695 Allowance for uncollectible accounts 2,695
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? O Debit Accounts Receivable; credit Allowance for Sales Returns. O Debit Bad Debt Expense; credit Accounts Receivable. O Debit Sales Returns; credit Allowance for Uncollectible Accounts. O Debit Sales Returns; credit Accounts Receivable.
Debit Sales Returns; credit Accounts Receivable.
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? O Credit cash $1960 O Debit cash $2,000 O Credit cash $2,000 O Debit cash $1960
Debit cash $2,000 Reason: The customer must pay the full amount if paid after 10 days.
When do you, the seller, record revenue from a goods or services, that you provided to a customer. Future collection from the customer is probable.
Immediately Reason: Even though no cash is received at the time of the credit sale, the seller records revenue immediately once goods or services are provided to the customer and future collection from the customer is probable.
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
Trade discount:
Reduction in the listed price of a good or service.
A trade discount is O an increase in the account receivable. O a percentage reduction of the amount due for early payment. O a percentage reduction from list price. O a rebate from the manufacturer.
a percentage reduction from list price.
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
Trade receivable is another term for ________ receivable.
accounts
Flounder Corp. provided $12,000 of services on account. The entry to record this transaction would include a debit to -accounts payable. -sales. -retained earnings. -accounts receivable.
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 allowance for uncollectible accounts is a contra account to
accounts receivable.
GAAP requires Uncollectible accounts to be accounted using the
allowance method.
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.
During its first year of operations, Kimbrough Corporation sold $14 million worth of goods on account. At the end of the year, $5 million remains due from customers. If the company estimates that 20% of the total year-end accounts receivable will not be collected, it will record a:
credit to Allowance for Uncollectible Accounts for $1 million
On September 1, Year 1, a company collects a $5,000 six-month, five percent promissory note. The entry to record the collection at maturity date will include a:
credit to Interest Revenue for $125
An aging schedule classifies accounts receivable based on
length of time outstanding.
Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts:
decrease total assets and decrease net income.
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 receivables turnover ratio and the average collection period provide information about a company's -effectiveness in managing receivables -ability to generate sales -amount of net credit sales
effectiveness is managing receivables
A high receivables turnover ratio is a sign of a company's:
effectiveness of credit sales and collection policies
Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are: -reliable, but not relevant -free from errors -subject to inaccuracy
subject to inaccuracy
For accounts receivable, the longer an account is outstanding,
the more likely it will prove uncollectible.
The average collection period is calculated as 365 divided by
the receivables turnover ratio
The financial statement effects of recording an allowance for estimated sales returns are that: O assets increase O equity decreases O assets decrease O equity increases O net income decreases O net income increases
- equity decreases - assets decrease - net income decreases
A trade discount is a reduction from the list price, which is used to O disguise real prices from competitors O give quantity discounts to customers O reduce the sale price for interest received O encourage customers to pay quickly O change prices without publishing a new catalog
-give quantity discounts to customers -change prices without publishing a new catalog -disguise real prices from competitors
At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $15,000. By the end of the year, actual bad debts total $17,000. 1. Record the write-off to uncollectible accounts. 2. What is the balance of Allowance for Uncollectible Accounts?
1. Allowance for uncollectible accounts 17,000 Accounts receivable 17,000 2. $2,000 It is a debit balance
A trade discount is a reduction from the list price, which is used to: O encourage customers to pay quickly O change prices without publishing a new catalog O reduce the sale price for interest received O give quantity discounts to customers O disguise real prices from competitors
1. change prices without publishing a new catalog 2. give quantity discounts to customers 3. disguise real prices from competitors
On October 1, 2018, Oberley Corporation loans one of its employees $20,000 and accepts a 12-month, 8% note receivable. Calculate the amount of interest revenue Oberley will recognize in 2018 and 2019.
2018: (20,000 X 3/12 X 0.0.8%) = 400 2019: (20,000 X 9/12 X 0.08%) = 1,200
Credit sales typically include an informal credit arrangement requiring payment within ______ days.
30 to 60
Payment for credit sales are typically due in _______ to _______ days.
30 to 60
The formula for average collection period is
365 divided by the receivable 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 Reason: Net credit sales/average accounts receivable = $200,000/((40,000+60,000)/2) = 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
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
The legal right to receive cash is valuable and represents an_________ of the company. (Part of the Accounting Equation)
Asset This asset is referred to as accounts receivable (sometimes called trade receivables).
What is the transaction that required the following entry?
Collect on interest-bearing note receivable.
Allowance for Uncollectible accounts are not liabilities, they are _______ ______.
Contra Asset
Allowance for uncollectible accounts:
Contra asset account representing the amount of accounts receivable not expected to be collected.
Sales return Sales Allowances Sales discounts These are all _________ ________ accounts. They are (added to/subtracted from) total revenues when calculating net revenues.
Contra revenue Subtracted from
Students sometimes misclassify contra revenue accounts as expenses. Like expenses, contra revenues have normal debit balances and reduce the reported amount of net income. What is the key difference?
Contra revenues represent reductions of revenues, whereas expenses represent the separate costs of generating revenues.
The delay in collecting cash from customers and the possibility that some customers may end up not paying at all are both ______ of ________ ______.
Cost of extending credit Note: These disadvantages reduce the operating efficiency of the company and lead to lower profitability.
Define Sales return
Customers returns a product
What are Uncollectible accounts:?
Customers' accounts that no longer are considered collectible. Also known as Bad Debts.
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
What is Accounts Receivable?
The amount of cash owed to the company by its customers from the sale of goods or services on account.
How do we reduce revenue for sales returns?
We use a Contra revenue account- sales return
The percentage-of-receivables approach to measuring bad debt expense is referred to as _____ method
a balance sheet
Accounts receivable should be classified as a(n)
asset.
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 O at the point of delivery. O when the contracts signed. O when all expenses are estimated O when cash is collected.
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
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
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate.
A trade discount is recognized O as a contra account to accounts receivable. O by reducing the revenue amount recorded. O by increasing the revenue amount recorded. O as trade discount revenue.
by reducing the revenue amount recorded.
Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.
contra-asset
A(n) ______ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high.
credit
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.
At the end of the year, companies must record estimated contra revenues for estimated sales returns and allowances and sales discounts pertaining to O current year sales only. O future sales only. O both current year and future year sales.
current year sales only.
Using the aging method, Carlton Company calculates the estimated ending balance in the Allowance for Uncollectible Accounts to be $12,000. Prior to adjusting entries, the Allowance for Uncollectible Accounts has a credit balance of $3,000. The year-end adjustment would include a:
debit to Bad Debt Expense for $9,000
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: O debit to Interest Receivable of $10 O debit to Interest Revenue of $10 O credit to Interest Revenue of $120 O credit to Interest Receivable of $20
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.
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 receivable, $2,000. credit to interest revenue, $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 x 0.08 x (3/12)
A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 6. The receipt of payment will include a:
debit to cash for $980- paid within 10 days
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
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: O equity increases O equity decreases. O assets decrease O liabilities increase O liabilities decrease O assets increase
equity decreases assets decrease
Because some of the amounts reported in financial statements are based on ________, some of the information may be inaccurate.
estimates
Under the allowance method, a company reports its accounts receivable for the net amount _____ to be collected
expected
Companies extend credit to customers and sell goods on account because
it increases sales.
The average collection period is an estimate of
the number of days the average account receivable balance is outstanding.
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. -net realizable value of accounts receivable is $305,000. -bad debt expense for the period is $25,500. -net sales is $305,000.
the target amount in allowance for uncollectible accounts is $25,500.
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year.
Accounts receivable from sales to customers are ______ receivables.
trade a.k.a accounts receivables
