AC 210: Chapter 8

Days to Collection Calculation:

365 days/receivables turnover ratio

2/12; interest rate = $1000 (P) x 12% (R) x 2/12 (T)

A 2-month interest calculation on a 3-year, 12% annual rate, $1,000 note receivable has a time variable of:

Channel Stuffing

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

Debit to Interest Receivable of $10

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

Bad Debt Expense of $7250 on the income statement and Allowance for Doubtful Accounts of $8000 on the balance sheet (Credit to AFDA and Debit to BDE)

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging-of-receivables method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report:

Sales to decrease and Bad Debt Expense to decrease

Accepting only cash and canceling a credit card program that previously allows customers to purchase merchandise in credit may cause:

$2100; A write-off is recorded with a debit to the Allowance and a credit to Accounts Receivable. The write-off has no effect on net receivables which equals a lower Accounts Receivable minus a lower Allowance balance. (Net Receivables = ($2300-80) - ($200-80) = $2100)

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:

Factoring

An arrangement where receivables are sold to another company for immediate cash

The same period the related credit sales are recorded

An objective of the expense recognition (matching) principle is to have bad debt expense debited in:

Recovery

Collection of a previously written-off account is called a(n):

Allowance for Doubtful Accounts of $1000 credit balance and Bad Debt Expense of $950 ($1000- 50 (unadjusted))

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:

Allowance for Doubtful Accounts of $2050 credit balance ($50 credit unadjusted balance + $2000 credit for the amount expensed) and Bad Debt Expense of $2000

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:

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

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

Subsidiary Account

For billing and collection purposes, companies keep a separate accounts receivable account for each customer called a:

(1) The company loans money to employees of businesses, (2) The company sells expensive items for which coroners require and extended payment period, or (3) The company concerts and existing account receivable to a note receivable to allow an extended payment period

In which situations does a company issue a note receivable?

Debit to Bad Debt Expense of $1000 and Credit to Allowance for Doubtful Accounts of $1000

Management estimated that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts include a:

Direct write-off

Not considered an acceptable method under GAAP

Debit to Cash of $4000, Credit to Interest Receivable of $3000, and Credit to Interest Revenue of $1000

On Feb. 1, 2016, Stretchers, Inc., receives $4,000 of interest of which $3,000 was earned and recorded in the prior accounting period ended Dec. 31, 2015. The entry to record the collection of interest in Feb. 1 includes a:

Allowance for Doubtful Accounts is a:

Permanent account so its balance carried forward to the next accounting period

Calculating interest:

Principal (the amount of the note receivable) x Interest Rate (the annual interest rate charged on the note) x Time (how many months out of 12 or how many days out of 365)

Company C: 2.4, Company A: 3.4, Company B: 5.6

Rank companies A-C based on how favorable their receivables turnover ratio is (from least to most):

Percentage of Credit Sales

Simpler to apply but less accurate

Bad Debt Expense is a:

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

Credits

The Allowance for Doubtful Accounts is a contra-asset account. Increase to the account (to record the periods estimated bad debt expense) are recorded with:

Debited

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

Assets to decrease and Stockholders equity to decrease

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

Debit to Cash and Credit to Notes Receivable

The correct journal entry for the collection of a note receivable includes a:

Expense Recognition (matching) Principle

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

Debit to Notes Receivable of $1000 and Credit to Cash $1000

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

Debit to Allowance for Doubtful Accounts and Credit to Accounts Receivable

The entry to record the write-off of a specific customers account requires a:

Debit to Accounts Receivable of $5.6 million and Credit to Sales Revenue of $5.6 million

The journal entry to record $5.6 million in sales in account includes a:

(1) Report accounts receivable at the amount the company expects to collect (net realizable value) and (2) Match the cost of bad debts to the accounting period in which the related credit sales are made

The objectives when accounting for accounts receivable and bad debts are to:

Aging of Accounts Receivable

Uses more detailed data and is more accurate

It is time-consuming, costly, and can annoy customers and cause them to take their business elsewhere

What are potential drawbacks of speeding up collection of receivables?

Make an adjusting entry at the end of the current period to accrue the interest earned

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?

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

When recording the adjusting entry for uncollectible accounts using the allowance method, customers subsidiary accounts are not directly reduced. The reason is:

Debit to Bad Debt Expense and Credit to Allowance for Doubtful Accounts

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

(1) Avoid lengthy cash collection periods and (2) reduction of bad debts expense

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

Receivables Turnover Ratio:

net sales: (Y1)/net accounts receivable: (Y1+Y2)/2