Accounting Chapter 5

On January 1, 2021, Nees Manufacturing lends $10,000 to Roberson Supply using a 9% note due in eight months. Calculate the amount of interest revenue Nees will record on September 1, 2021, the date that the note is due.

$900

At the beginning of 2021, Clay Ventures has total accounts receivable of $100,000. By the end of 2021, Clay reports net credit sales of $900,000 and total accounts receivable of $200,000. What is the receivables turnover ratio for Clay Ventures?

6.0

The allowance method is required by

GAAP

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable.

The income statement approach for estimating bad debts focuses on

current year's credit sales.

at the end of its fist year of operations, a company estimates future uncollectible accounts to be $4,500. The company's year-end adjusting entry would include

a credit to allowance for uncollectible accounts for $4,500

The income statement approach for estimating bad debts uses a percentage of

credit sales.

A disadvantage to selling on account is

customers do not always pay.

uncollectible accounts (bad debts)

customers' accounts that no longer are considered collectible

calculate net revenues using returns, allowances, and discounts.

sales returns, sales allowances, and sales discounts are contra revenue accounts. WE subtract the balances in these accounts from total revenues when calculating net revenues.

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 services

discount terms

such as 2/10, n/30, are a shorthand way to communicate the amount of the discount and the time period within which it's available

The percentage-of-receivables method of estimating bad debt applies ____ to _____.

a single percentage; accounts receivable

Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.

future; current

bad debt expense

the cost of estimated future bad debts that is reported as an expense in the current year's income statement

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What amount would Fox record as revenue on March 17? What is the amount of net revenues (sales minus sales discounts) as of March 23?

$12,000 $11,760

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 the older the account, the less likely it is to be collected

we record the sales allowance in a contra revenue account ___

sales allowances

contrast the allowance method and direct write-off method when accounting for uncollectible accounts

the direct write-off method waits to reduce accounts receivable and record bad debt expense until accounts receivable prove uncollectible in the future. This leads to accounts receivable being overstated in the current year. The direct write-off method generally is not acceptable for financial reporting.

adjusting entries to record estimated contra revenues at the end of the year

1. Revenues are reported for the amount of cash a company expects to be entitled to receive from customers for providing goods and services 2. total revenues are reduced by sales returns, sales allowances, and sales discounts that occur during the year 3. total revenues are further reduced by an adjusting entry at the end of the year for the estimate of additional sales returns, sales allowances, and sales discounts expected to occur in the future but that relate to the current year

What is the formula for the receivables turnover ratio?

Net credit sales divided by average accounts receivable (net).

accounts receivable

the amount of cash owed to the company by its customers from the sale of goods or services on account

sales returns, sales allowances, and sales discounts are contra revenue accounts

we subtract the balances in these accounts from total revenues when calculating net revenues

estimate uncollectible accounts using the percentage-of-credit-sales method

when applying the percentage-of-credit-sales method, we adjust the allowance for uncollectible accounts for the current year's credit sales that we don't expect to collect (rather than adjusting at the end of the year for the percentage of accounts receivable we don't expect to collect).

A company has the following account balances at the end of the year: Credit sales = $400,000 Accounts Receivable = $80,000 Allowance for Uncollectible Accounts = $400 CREDIT The company estimates future uncollectible accounts to be 4% of accounts receivable. At what amount would Bad Debt Expense be reported in the current year's income statement?

$2,800

A company has the following account balances at the end of the year: Credit sales = $400,000 Accounts Receivable = $80,000 Allowance for Uncollectible Accounts = $400 DEBIT The company estimates future uncollectible accounts to be 4% of accounts receivable. At what amount would Bad Debt Expense be reported in the current year's income statement?

$3,600

A company has the following account balances at the end of the year: Credit Sales = $400,000 Accounts Receivable = $80,000 Allowance for Uncollectible Accounts = $400 CREDIT The company estimates 15 of credit sales will be uncollectible. At what amount would Allowance for Uncollectible Accounts be reported in the current year's balance sheet?

$4,400

the allowance method for uncontrollable accounts

- is required by GAAP - allows for the possibility that some accounts will not be collected - reports net accounts receivable for the amount of cash expected to be collected

On May 1, 2021, Nees Manufacturing lends $10,000 to Roberson Supply using a 9% note due in twelve months. Nees has a December 31 year-end. Calculate the amount of interest revenue Nees will report in its 2021 and 2022 income statements.

2021 = $600; 2022 = $300

The direct write-off method is generally not permitted for financial reporting purposes because

Accounts receivable are not stated for the amount of cash expected to be collected.

average collection period

Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio

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 Debit to Allowance for Uncollectible Accounts

Notes Receivable

Formal credit arrangements evidenced by a written debt instrument, or note

percentage-of-receivables method

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected this method is sometimes referred to as a balance sheet method, because we base the estimate of bad debts on a balance sheet account - accounts receivable.

receivables turnover ratio

Number of times during a year that the average accounts receivable balance is collected (or "turns over"). It equals net credit sales divided by average accounts receivable. the more frequently a business is able to "turn over" its average accounts receivable, the more effective a company is at granting credit to and collecting cash from its customers.

companies record an asset (accounts receivable) and revenue when they sell goods or services to their customers on account, expecting collection in the future.

Once the receivable is collected, the balance of accounts receivable is reduced.

direct write-off method

Recording bad debt expense at the time we know the account is uncollectible the direct write-off method is generally not allowed for financial reporting under GAAP. Rather, it is primarily used for tax reporting.

Net accounts receivable

The difference between total accounts receivable and the allowance for uncollectible accounts

Using the allowance method, the entry to record a write-off of accounts receivable will include:

a debit to allowance for uncollectible accounts

invoice

a source document that identifies that date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms. 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.

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

account receivable.

The allowance for uncollectible accounts is a contra account to

accounts receivable.

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.

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

allowance method

contra revenue account

an account with a balance that is opposite, or "contra," to that of its related revenue account the reason we use a contra revenue account is to keep a record of the total revenue recognized separate from the reduction due to subsequent sales returns

accounts receivable should be classified as a(n)

asset

accounts receivable are best described as

assets of the company representing the amount owed by customers

establishing an allowance for uncollectible accounts correctly reports accounts receivable in the balance sheet at the amount expected to be collected

bad debt expense is reported in the income statement

A customer account that is not expected to be collected is referred to as a(n) ___ debt

bad/uncollectible

recognize accounts receivable at the time of credit sales

companies record an asset (accounts receivable) and revenue when they sell goods or services to their customers on account, expecting collection in the future. Once the receivable is collected, the balance of accounts receivable is reduced.

allowance for uncollectible accounts

contra asset account representing the amount of accounts receivable that we do not expect to collect we report the allowance for uncontrollable accounts in the asset section of the balance sheet, but it represents a reduction in the balance of accounts receivable

sales return

customer returns a product

establish an allowance for uncollectible accounts

customers' accounts that we no longer consider collectible are referred to as uncollectible accounts, or bad debts. Under the allowance method, accounts receivable are reported for the net amount expected to be collected. At the end of the current year, estimated future uncollectible accounts are reported in a contra asset account, reducing net accounts receivable. Establishing an allowance for uncollectible accounts correctly reports accounts receivable in the balance sheet at the amount expected to be collected. Bad debt expense is reported in the income statement.

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.

The journal entry to record bad debt expense includes:

debit to bad debt expense credit to allowance for uncollectible accounts

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

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

A trade discount is a reduction from the list price, which is used to:

disguise real prices from competitors give quantity discounts to customers change prices without publishing a new catalog

the benefit of extending credit is that the seller makes it more convenient for the buyer to purchase foods and services

in the long term, credit sales should benefit the seller by increasing profitability if the company

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) ___ approach to measuring bad debts

income statement

Companies extend credit to customers and sell goods on account because

it increases sales.

allowance method

method of reporting accounts receivable for the net amount expected to be collected using the allowance method, we account for events (customers' bad debts) that have not yet occurred but that are likely to occur) under the allowance method, companies are required to estimate future uncollectible accounts and report those estimates in the current year.

using the allowance method, the effect on the current year's financial statements of writing off an account receivable generally is to

neither decrease total assets nor decrease net income

account for notes receivable and interest revenue

notes receivable are similar to accounts receivable except that notes receivable are formal credit arrangements made with a written debt instrument, or note. we calculate interest as the face value of the note multiple by the states annual interest rate multiplied by the appropriate fraction of the year that the note is outstanding. We record interest earned on notes receivable but not yet collected by the end of the year as interest receivable and interest revenue.

sales discount

reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time a sales discount is intended to provide incentive to the customer for quick payment

trade discounts

reduction in the listed price of a good or service companies typically use trade discounts to provide incentives to larger customers or consumer groups to purchase from the company. Trade discounts also can be a way to change prices without publishing a new price list or to disguise real prices from competitors.

we reduce revenue for sales returns using a contra revenue account _____

sales Returns

we record sales discounts in a contra revenue account ____

sales discounts

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

calculate key ratios investors use to monitor a company's effectiveness in managing receivables

the receivables turnover ratio and average collection period can provide an indication of management's ability to collect cash from customers in a timely manner.

the cost of extending credit is the delay in collecting cash from customers, and some customers may not end up paying at all

these disadvantages reduce the operating efficiency of the company and lead to lower profitability

Accounts receivable are typically classified as current assets because

they will be converted to cash within 1 year.

the legal right to receive cash is valuable and represents an asset of the company.

this asset is referred to as accounts receivable (sometimes called trade receivables)

The allowance method estimates

uncollectible accounts

write off accounts receivable as uncollectible

writing off a customer's account as uncontrollable reduces the balance of accounts receivable but also reduces the contra asset - allowance for uncollectible accounts. The net effect is that there is no change in the net receivable (accounts receivable less the allowance) or in total assets.

The upside of extending credit to customers is that it boosts sales by allowing customers the ability to purchase on account and pay cash later. accounts receivable is an asset, reported in the company's balance sheet

The downside of extending credit to customers is that not all customers will pay fully on their accounts.

A trade discount is

a percentage reduction from list price.

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

The receivables turnover ratio indicates

the number of times during a year that the average accounts receivables were collected.

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.

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

adjust the allowance for uncollectible accounts in subsequent years

using the aging method to estimate uncollectible accounts is more accurate than applying a single percentage to all accounts receivable. The aging method recognizes that the longer accounts are past due, the less likely they are to be collected. The year-end adjustment for future uncollectible accounts is affected by the current balance of allowance for uncollectible accounts before adjustment. The current balance before adjustment equals the balance of the allowance account at the beginning of the current year (or end of last year) less actual write-offs in the current year.