Accounting Financial Chapter 8

A company lends $1,000 each to two employees at a rate of 6% on December 1. One employee is to repay the note in 3 months and the other in 6 months. At December 31, how much interest will the company accrue?

$10

Based on an aging of accounts receivables, management assigned 1% to the $100,000 of receivables 0-30 days outstanding, 5% to the $10,000receivables 31-60 days and 20% to the $1,000 of receivables over 60 days. After making the adjusting entry the balance in the Allowance for Doubtful Accounts will equal ________.

1700

The days to collect ratio is computed as ______.

365 divided by the Receivable Turnover Ratio

If the Allowance for Doubtful Accounts was debited, what account was credited?

Accounts Receivable

A _____ of accounts receivable method is based on the amount of days the receivables have been unpaid. When determining the desired amount of the Allowance for Doubtful Accounts, the older receivables are assigned a higher percent than newer ones.

Aging

Which of the following is a permanent account whereby the ending balance of the prior accounting period equals its beginning balance of the next.

Allowance for Doubtful Accounts

Which of the following is contra-asset account? Depreciation Expense Allowance for Doubtful Accounts Deferred Revenue Common Stock

Allowance for Doubtful Accounts

Assuming the allowance method, the entry to record the write-off of a specific, non-paying customer is recorded with a debit to _____.

Allowance for Doubtful Accounts and credit to Accounts Receivable

Why should an employee recording the write-offs be a different employee than the one who receives cash from the collections of credit sales?

An employee could cover up a theft by debiting Allowance for Doubtful Accounts and the customer's Accounts Receivable

By comparing the number of days to collect with the length of the credit policy, companies can infer that customers _____ if the days to collect is high

Are more likely to default May be dissatisfied with the product or service

An allowance method requires that ______.

Bad Debt Expense be recorded in the same period as the related credit sales Allowance for doubtful Accounts be netted against Accounts Receivable

Rank companies A-C based on how favorable their receivables turnover ratio is

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

The receipt of an interest payment

Debit cash and credit interest receivable

The issuance of a note

Debit notes receivable and credit cash

Bad Debt Expense _______. Is based on actual events and does not require estimation Should exceed the revenue generated from incurring the cost Is a cost of extending credit to customers Is an estimate

Is a cost of extending credit to customers Is an estimate

Adjusting entry to accrue for interest earned is often needed when a company has _____.

Notes Receivable

Which of the following accounts are temporary accounts closes at the end of the accounting period into Retained Earnings?

Sales Revenue Bad Debt Expense Depreciation Expense

Notes Receivable are used for _____.

Selling large dollar-value items Lending money to individuals or businesses Extending payment periods

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?

The same period as credit sales

What is the effect on the accounting equation if a company does not write off specific, non-paying customers' accounts receivable?

There is no effect

Why would a company factor its receivables?

To get cash before the customers pay

What effect does the collection of a note receivable, excluding interest, have on the accounting equation?

Total assets remain the same

Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when _____.

a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable

removing an uncollectible account and its corresponding allowance from the accounting records is called _____.

a write-off

Accounts receivable represent

amounts owed to a business by its customers

The adjusting entry to record the estimated amount of bad credit sales in a debit to _____ _____ _____ and a credit to allowance for doubtful accounts.

bad debt expense

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

channel stuffing

allowance for doubtful accounts is a _____-asset account and has a normal _____ balance.Re

contra credit

On March 1, Scents, Inc. lent $1,000 to an employee at a rat of 6% for 3 months. Scents' entry to record the loan of $1,000 to its employee includes a _____

credit to Cash of $1,000 debit to Notes Receivable of $1,000

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account are recorded with _____.

credits

The receipt of the principal payment

debit cash and credit notes receivable

The adjusting entry to record interest owed

debit interest receivable and credit interest revenue

The _____ write-off method is not allowed under GAAP.

direct

An arrangement where receivables are sold to another company for immediate cash is called _____.

factoring

A subsidiary account ______

is kept for each customer's accounts receivable and the total of all customers' accounts receivable is reported on the balance sheet

What is occurring if a company is debiting Cash and crediting Notes Receivable?

it is collecting the principal on amounts lent earlier

The employee who records the entry to write off uncollectible accounts should _____.

not be the same person who receives collections from customers

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are ____

susceptible to management manipulation

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are_____.

susceptible to management manipulation

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ____ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than

Accounts Receivable had a $2,300 balance, and the Allowance for Doubtful Accounts has a $200 credit balance. An $80 account receivable is written-off. Net receivables after the write-off equals

$2,100 (2,300-80)-(200-80)=2100

ABC corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. what is the downside to such a strategy?

Credit card companies charge fees that reduce profits

What are the potential drawbacks of speeding up collections of receivables

Customers may get annoyed and take their business elsewhere Hounding customers to pay if their receivables are past due is time-consuming and costly

If a company is debiting Interest Receivable and crediting Interest Revenue, what must be the case?

It is the end of the accounting period and it is adjusting entry for interest generated but not yet collected.

Bad Debt Expense is a

temporary account so its balance is closed at the end of the accounting period

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be _____ the Allowance for Doubtful Accounts on the balance sheet.

$100 greater than

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 accounts receivable method and estimates that $8,000 of its receivables will be uncollectable. After the adjusting entry is made, ABC's financial statements will report___

Bad debt expense of $7250 on the income statement; allowance for doubtful accounts of $8000 on the balance sheet

Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually

Debit Notes Receivable and credit Cash Debit Interest Receivable and credit Interest Revenue Debit Cash and credit Interest Receivable Debit Cash and credit Notes Receivable, Interest Revenue and Interest Receivable