IA Ch. 7 SB Pt. 2

The income statement approach for estimating bad debts focuses on

current year's credit sales.

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

sales return

True or false: Inventory that is expected to be returned in the future is included on the balance sheet of the company expecting the return.

t

True or false: The possibility of damaged or defective merchandise is included in a company's estimate of returns.

t

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following? (Select all that apply.)

-Debit Accounts Receivable. -Credit 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? (Select all that apply.)

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

How is inventory recorded related to returns? (Select all that apply.)

-Inventory expected to be returned is included as an asset on the balance sheet. -The inventory account is increased when returns occur to include the returned items.

Which of the following factors are considered when estimating sales returns?

-Overall economic conditions -Past history of returns -Changes in the customer base

How does the CECL model differ from current GAAP? (Select all that apply.)

-The "probable" threshold for identifying impaired receivables is removed. -Bad debt estimates will be based on predictions about the future.

How do sellers typically account for returns? (Select all that apply.)

-Using an adjusting entry at the end of the period for any remaining future expected returns. -As returns occur.

Accounts receivable are initially recorded at the exchange price agreed upon by the buyer and seller and subsequently reduced by which of the following? (Select all that apply.)

-allowance for sales returns -allowance for uncollectible accounts

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

-allowance for uncollectible accounts

Shannon Corp. determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include (Select all that apply.)

-debit to Allowance for Uncollectible Accounts. -credit to Accounts Receivable

The following information is taken from Landon Corp.'s accounting records: Account Beginning Balance Ending Balance Accounts Receivable $100,000 $130,000 Allowance for Uncollectible Accounts 12,000 16,000 During the year, Landon wrote off $7,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was (Select all that apply.)

-debit to Bad Debt Expense for $11,000. Reason: $16,000 + $7,000 - $12,000 -credit to Allowance for Uncollectible Accounts for $11,000. Reason: $16,000 + $7,000 - $12,000

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a

-debit to Bad Debt Expense for $2,000. Reason: Only $100,000 of the sales are on credit. Cash sales do NOT require an allowance because they are received in cash.

The following information is taken from Connor Corp.'s accounting records: Account Beginning Balance Ending Balance Accounts Receivable $100,000 $140,000 Allowance for Uncollectible Accounts 15,000 18,000 During the year, Connor wrote off $17,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was (Select all that apply.)

-debit to Bad Debt Expense for $20,000. Reason: $18,000+$17,000-$15,000 -credit to Allowance for Uncollectible Accounts for $20,000. Reason: $18,000+$17,000-$15,000

Joyce determines that a customer account of $20,000 should be written off as uncollectible. The journal entry to write off the account using the allowance method will include which of the following entries? (Select all that apply.)

-debit to allowance for uncollectible accounts -credit to accounts receivable

Below is a schedule of accounts receivable. Using the aging method, determine the ending balance in the allowance for uncollectibles account. Length of time outstanding Accounts receivable balance Percentage estimated uncollectible 0-30 days $100,000 1% 30-60 days 60,000 2% 60-90 days 20,000 3% Over 90 days 50,000 4%

4800

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry?

Adjustment for sales returns that occurred.

Which of the following is a contra account to accounts receivable?

Allowance for sales returns

When an accounts receivable is written off, which account is impacted?

Allowance for uncollectible accounts

When a previously written off account is collected, what happens after the reinstatement?

Collection is recorded with a debit to cash and a credit to accounts receivable.

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable.

A company believes its sales returns will be material. What is the journal entry required?

Debit allowance for sales returns; credit sales returns. -debit sales returns -credit allowance for sales returns

Gino estimates future sales returns of 2% of total sales. In its third year of operations, Gino believes a more accurate estimate of returns is 3.5%. How should Gino handle this change?

On a prospective basis in the current year and future years.

Kuhn Company sells a product that historically is rarely returned by its customers. At the end of the current accounting period, Kuhn's accountant estimates that future returns of already sold products will be immaterial. Which of the following is the correct accounting treatment?

Recognize the returns when they occur

What happens when a receivable previously written off is collected in full?

Reinstate the receivable and the allowance for uncollectible accounts.

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements?

Year 1 net income is overstated.

The entry to write-off an uncollectible account includes the following:

a debit to the allowance account and a credit to accounts receivable

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?

allowance for sales returns

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

allowance for uncollectible accounts.

The balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable.

Inventory expected to be returned is included in what type of account?

asset

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as

bad debt expense

The direct write-off method

could result in a mismatching of expenses and revenue

True or false: In Year 1, Gilead Company estimates future returns to be $30,000; however, in Year 2 actual returns are $35,000. Gilead must restate its Year 1 financial statements to correct its initial estimate.

false

True or false: Most sellers estimate returns every time they make a sale.

false

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) --- --- approach to measuring bad debts. (Enter one word per blank.)

income statement

Failing to estimate sales returns can result in income being _______ in the period the sale is made and _______ in the period the product is returned.

overstated; understated

True or false: The CECL model broadens information that creditors should consider when estimating credit losses.

true

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

When the direct write-off method is used, an entry for bad debt expense is required

when the account receivable is determined to be uncollectible.

Under the allowance method, when is bad debt expense recognized?

when the allowance is created