Test 2 Chapter 8

A company has the following receivables: Advances to employees $ 1,580 Accounts receivable 1,050 Income taxes refundable 1,120 Interest receivable 950 Note receivable issued by its largest customer 2,520 A loan to the company president 8,000 Based on this information, what is the company's trade receivables?

$3,570 Solution: Trade receivables = $1,050 + 2,520 = $3,570

At the start of the year, Willet Company's Allowance for Doubtful Accounts had a credit balance of $31,000. During the year, it had credit sales of $2,300,000. It also wrote-off $80,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 6% of the balance in receivables. If the accounts receivable balance at December 31 was $300,000, what is the required adjustment to the Allowance for Doubtful Accounts that is needed at year-end?

$67,000 Solution: Bad debt expense = Ending accounts receivable times percent uncollectible minus the subtotal balance in the allowance Bad debt expense = ($300,000 x 6%) - (31,000 - 80,000) = $67,000

Which of the following is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company?

A concentration of credit risk

Which one of the following account pairs are both permanent accounts?

Accounts Receivable; Allowance for Doubtful Accounts

Which one of the following accounts is a temporary account?

bad debts expense

Accounts receivables that result from sales transactions are often called

trade receivables

The Allowance for Doubtful Accounts is necessary in accrual accounting because

when recording uncollectible accounts expense, it is not possible to know which specific accounts will not be collected from customers.

On May 12, Kelsey Company sold merchandise on account to Buyer Co. for $2,000 with terms 2/10, n/30. On May 18, Buyer Co. returns merchandise worth $200 to Kelsey Company. On May 24, Buyer Co. pays the balance due. What is the amount of cash received by Kelsey Company on May 24?

$1,800 Solution: The amount received on May 24 is $1,800. Because payment is not made within the discount period of 10 days, the amount received is $1,800 ($2,000 less the returned $200) with no discount.

On December 14, Walton Company sold $5,000 of merchandise on account to a customer with terms 1/10, n/30. On December 20, the customer returned $1,200 of merchandise to Walton Company. Walton Company received no payments from that customer in December. On December 21, Walton Company received $1,500 from a different customer for merchandise to be delivered in January. What is Walton Company's accounts receivable on December 31?

$3,800 Solution: A customer bought $5,000 of merchandise on account but returned $1,200 for a net purchase of $3,800. The customer did not pay during December. Another customer paid in advance which the seller would record as an increase in cash—not accounts receivable—and an increase in unearned revenue. Accounts receivable = $5,000 - 1,200 = $3,800

At the start of the year, Willet Company's Allowance for Doubtful Accounts had a credit balance of $22,000. During the year, it had credit sales of $1,100,000. It also wrote-off $50,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 2% of the balance in receivables. If the accounts receivable balance at December 31 was $250,000, what is the required adjustment to the Allowance for Doubtful Accounts that is needed at year-end?

$33,000 Solution: Bad debt expense = Ending accounts receivable times percent uncollectible minus the subtotal balance in the allowance Bad debt expense = ($250,000 x 2%) - (22,000 - 50,000) = $33,000

The maturity value of a $40,000, 9%, 50-day note receivable dated July 3 is

$40,500 Solution: Maturity value = Principal plus interest Maturity value = Principal + Principal x interest rate x time Notes stated in terms of days measure time as the number of days divided by 360 $40,000 + ($40,000 x .09 x 50/360) = $40,500

The following information relates to the beginning of the year: Accounts receivable, $370,000 Allowance for doubtful accounts (credit balance), $18,500 During the current year, sales on account were $1,200,000 and collections on account were $1,250,000. Also during the current year, the company wrote off $17,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $16,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

$64,500 decrease Solution: Ending accounts receivable, $370,000 + 1,200,000 - 1,250,000 - 17,000 = 303,000 Ending allowance for doubtful accounts, $16,000 (given) Ending cash realizable value, $303,000 - 16,000 = 287,000 Beginning cash realizable value, $370,000 - 18,500 = $351,500 Increase (decrease) in cash realizable value, $287,000 - 351,500 = ($64,500)

The following information is related to the beginning of the year balances. Accounts receivable, $2,100,000 Allowance for doubtful accounts (credit balance), $180,000 During the current year, sales on account were $580,000 and collections from customers were $344,000. Also during the current year, the company wrote off $32,000 in uncollectible accounts. At year-end, the company's credit manager estimates that $216,000 of the outstanding accounts receivable will be uncollectible. Bad debt expense for the current year is

$68,000 Solution: At the end of the period, accounts receivable has a balance of $2,100,000 (i.e., given). The Allowance for Doubtful Accounts should be adjusted so that is will have a balance equal to $216,000 (i.e., given). Prior to the adjusting entry, the Allowance for Doubtful Accounts has a credit balance of $148,000 (i.e., $180,000 - 32,000 = $148,000). The adjusting entry records the difference of $36,000 (i.e., $216,000 - 148,000 = $68,000).

An analysis and aging of the accounts receivable of a certain company at December 31 reveal the following data before year-end adjusting entries: Accounts receivable, $900,000 Allowance for doubtful accounts balance before adjustment (credit balance), $18,000 Amounts expected to become uncollectible, $60,000 How much is the cash realizable value (i.e., net realizable value) of the accounts receivable at December 31, after adjusting entries?

$840,000 Solution: In this case, accounts receivable is $900,000 and the ending balance in Allowance for Doubtful Accounts will be $60,000 after the year-end adjusting entry has been recorded. This will result in cash realizable value (i.e., net realizable value) of $900,000 less $60,000, or $840,000.

The financial statements of a company reports net sales of $200,000. It also reports inventory of $60,000 and $50,000 at the beginning of the year and end of year, respectively. Its average net accounts receivable is $30,000. What is the average collection period for accounts receivable in days (rounded)?

54.8 days Solution: Accounts receivable turnover = Net credit sales divided by average net accounts receivable Accounts receivable turnover = 200,000/[(40,000+20,000)/2] = 6.667 Average collection period (i.e., days in receivable) = 365/Accounts receivable turnover Average collection period (i.e., days in receivable) = 365/6.667 = 54.750 days

The financial statements of a company reports net credit sales of $375,000. It also reports net accounts receivable of $80,000 and $42,000 at the beginning of the year and end of year, respectively. Its average inventory is $55,000. What is the average collection period for accounts receivable in days (rounded)?

59.4 days Solution: Accounts receivable turnover = Net credit sales divided by average net accounts receivable Accounts receivable turnover = 375,000/[(80,000+42,000)/2] = 6.148 Average collection period (i.e., days in receivable) = 365/Accounts receivable turnover Average collection period (i.e., days in receivable) = 365/6.148 = 59.373 days

A corporation had net credit sales during the year of $400,000 and cost of goods sold of $150,000. The net accounts receivable at the beginning of the year was $60,000 and at the end of the year was $70,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,300,000. How much is the accounts receivables turnover?

6.15 Solution: The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its net accounts receivable average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $400,000/[($60,000 + $70,000)/2] = 6.15.

A corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The net accounts receivable at the beginning of the year was $100,000 and at the end of the year was $150,000. The balance of total assets at the beginning of the year was $1,000,000 and at the end of the year was $1,500,000. How much is the accounts receivables turnover?

6.4 Solution: The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its net accounts receivable average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $800,000/[($100,000 + $150,000)/2] = 6.4.

Which of the following is the correct sequence to report receivables on the balance sheet?

Accounts receivable, a 6-month note receivable, other receivables

Which one of the following is not a method used by companies to accelerate cash receipts?

Allowing customers to settle their accounts by issuing notes

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $60,000 at year-end. The total credit sales were $2,300,000 for the year. Management estimates that 3% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $200 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 2,000 Allowance for Doubtful Accounts 2,000 Solution: The Allowance for Doubtful Accounts needs an ending credit balance of 3% of $60,000 or $1,800. Since the pre-adjusted debit balance is $200, a credit of $2,000 is necessary to increase it to $1,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $2,000.

Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. Management estimates that 4% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment?

Bad Debts Expense 3,200 Allowance for Doubtful Accounts 3,200 Solution: Allowance for Doubtful Accounts needs an ending credit balance of 4% of $100,000 or $4,000. To increase the current credit balance of $800 to the required amount of $4,000, the account requires a credit of $3,200. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,200.

A company accepted $50,000 of Wells Fargo Visa credit card charges for merchandise sold on July 1. Wells Fargo charges 5% for its credit card use. What should the company debit as a result of this transaction?

Cash for $47,500 and Service Charge Expense for $2,500 Solution: The entry includes a credit to Sales for $50,000, a $47,500 debit to Cash, and a debit to Service Charge Expense for $2,500.

Net credit sales for the month are $6,000,000 for Stacy Clothiers. Its accounts receivable balance is $300,000. The allowance is calculated as 7% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $10,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $21,000 Solution: The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be equal to 7% times $300,000, or $21,000.

Schmidt Co. holds Murphy Inc.'s $20,000, 90-day, 8% note. What is the entry to be made by Schmidt Co. when the note is collected, assuming no interest has previously been accrued?

Debit Cash for $20,400, credit Notes Receivable for $20,000, and credit Interest Revenue for $400 Solution: When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $20,000 × 8% × 90/360 = $400. Total cash received = $20,000 + 400 = $20,400.

A company factors $300,000 of receivables. The factors assesses a 3% fee on the amount of receivables sold. What journal entry does it make when the factoring occurs?

Debit Cash for $291,000, debit Service Charge Expense for $9,000, and credit Accounts Receivable for $300,000 Solution: This entry records the receipt of cash as a debit for $291,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $9,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $300,000.

A company sold $7,000 of merchandise to customers who charged their purchases with a bank credit card. The company's bank charges it a 5% fee. Which one of the following is part of the journal entry to record this transaction?

Debit to Cash for $6,650 Solution: The fee is 5% times $7,000, or $350. The company will receive the difference between the face amount of the receivables and the fee, or $6,650. The journal entry includes a debit to cash for $6,650, a debit to Service Charge Expense for $350, and credit to sales for $7,000.

What is often the most critical part of managing receivables?

Determining who gets credit and who does not get credit

What is the maturity value equal to?

Face value plus interest

Young Company lends Dobson industries $40,000 on August 1 accepting a 9-month, 12% interest note. If Young Company prepares it financial statements as of December 31, what adjusting entry must it record?

Interest Receivable 2,000 Interest Revenue 2,000 Solution: A 12% $40,000 note dated August 1 will accrued five months of interest by December 31 computed as follows: Interest = Principal x Interest rate x Periods = $40,000 x 12% x 5/12 =$2,000 The creditor making the loan will debit Interest Receivable for $2,000 and credit Interest Revenue for $2,000.

A company receives a $5,000, 3-month, 6% promissory note from a customer in settlement of an account receivable. What journal entry will the company record as a result of this transaction?

Notes Receivable 5,000 Accounts Receivable—Bay Company 5,000

A company receives a $7,000, 3-month, 6% promissory note from a customer in settlement of an accounts receivable. What journal entry will the company record as a result of this transaction?

Notes Receivable 7,000 Accounts Receivable—Ray Company 7,000

If a company uses the allowance method for uncollectible accounts, then the entry to record writing-off a customer's $800 account includes

a debit to Allowance for Doubtful Accounts for $800 and a credit to Accounts Receivable for $800.

A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should include

a debit to Cash for $882,000 Solution: The factor purchases the accounts receivable but charges a fee or commission. The company selling the receivables to the factor receives cash but charges the fee to an expense account. Debit cash for $882,000 (i.e., $900,000 - 2% x $900,000) Debit Service Charge Expense for $18,000 (i.e., 2% x $900,000) Credit accounts receivable by $900,000

When an uncollectible account is recovered after it has been written off, which of the following journal entries will be recorded first?

debit accounts receivable and credit allowance for doubtful accounts

Writing-off a specific customer's accounts receivable under the allowance method

does not affect the balance of Cash.

The direct write-off method of accounting for bad debts

does not require estimates of bad debt expense

A debit balance in the Allowance for Doubtful Accounts

indicates that actual bad debt write-offs have exceeded previous provisions for bad debts

The account called Allowance for Doubtful Accounts

is deducted from accounts receivable on the balance sheet to compute cash realizable value.