ACCT Chp 7 Learn Smart

C Co. uses the allowance method to account for bad debts. During 2010, C Co. determined that a balance of $200 for A Co. was uncollectible and wrote the balance off. What is the total decrease to net income related to this entry?

$0 The decrease in net income occurs when bad debts is estimated (allowance account is increased). This entry reduces accounts receivable using the allowance account

C Co. has $100,000 in accounts receivable and an existing $800 Credit balance (before adjustment) in the ADA on Dec 31 2008. Past experience suggest that 5% of receivables are uncollectible. What's the Bad Debts Expense for 2008?

$4,200 Desired Balance in ADA = $5000 (100,000 x 5%) Existing Credit balance in ADA = $800 $5000-$800 = $4200

L Co. Uses the allowance method to ADA. At the end of 2010 L Co.'s unadjusted trial balance shows an AR balance of $400,000; ADA debit balance of $400, and sales $1,200,000. Based on history, L Co. estimates that bad debits will be 1% of AR. The entry to record estimated bad debts will include a debit to BDE in the amount of:

$4,400

L Co. Uses the allowance method to account for bad debts. At the end of 2010, L co accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (credit); and sales of $500,000. Based on history, L co. estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

$400 $25,000 x 2% = $500 desired ending balance in the allowance account. Subtract the beginning credit balance to determine the amount of the adjusting entry ($500-100=$400)

L Co. Uses the allowance method to account for bad debts. At the end of 2010, L Co. AR balance is $25,000; ADA credit $100; Sales $500,000. Based on history, L Co. estimates that bad debts will be 2% of AR. The entry to record estimated bad debts will include a debit to BDE in the amount of:

$400 Explanation: $25,000 x 2% = $500 desired ending balance in the ADA account. Subtract the beg. credit balance from $500 to get $400 ($500-$100 = $400)

C Co. has $100,000 in accounts receivable and an existing $500 debit balance (before adjustment) in the ADA accounts on dec. 31, 2008. Past experience suggests that 5% of receivables are uncollectible. What's the bad Debts Expense for 2008?

$5500 Desired Balance in ADA = $5000 (100,000 x 5%) Existing Debit balance in ADA = $500 $5000+$500 = $5500

What are the two methods for writing off Bad Debts

1. Direct Write off Method 2. Allowance Method

What are the two methods under the allowance method to estimate bad Debts?

1. Percent of Sales 2. Percent of Accounts Receivable/Aging

On 12/31 L Co. estimates that $1000 of its accounts receivable balance is uncollectible. L Co. uses the allowance method for bad debts. The adjusting entry to record this estimate would include a credit to:

ADA

Estimated Bad Debts Expense

ALWAYS above the "line" (Look at notes) % of Sales: Credit Sales x %Sales (Given) % of AR: Desired ending balance in ADA + (existing debit balance of ADA) OR - (existing credit balance of ADA) = Estimated Bad debt expense

A(n) [blank] is a supplementary record created to maintain a separate account for each customer

AR ledger

The [blank] method, also referred to as balance sheet method, uses balance sheet relations to estimate bad debts -mainly the relationship between AR and the allowance account

Accounts Receivable - The AR method is one of the ways of computing the adjusting entry under the allowance method. The other way is based on percent of sales

A Company Determines that a customer balance of $400 from Allia, Inc is uncollectible. A Company uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a debit to:

Allowance for Doubtful Accounts (ADA) - bad debts expense would be debited if A Company was using the direct write-off method, but they're using the allowance method

With the allowance method, when an account is determined to be uncollectible the debit goes to:

Allowance for Doubtful accounts

Principle

Amount that the signer agrees to pay back not including interest

Some customers may not pay their account. Uncollectible amounts are referred to as

Bad Debts Expense

On Dec.1 C Co. accepted a 60 day, 6% $1000 note due Jan 30. On December 31, the appropriate year end adjusting entry was made. On Jan 30 the note was honored and paid in full. THe entry to record receipt of payment on Jan 30 (assuming no reversing entry was made) would include a credit to:

C: Notes Receivable $1000 C: Interest Receivable $5 C: Interest Revenue $5

On November 1 A Co. accepted a 90 day, 6% 2000 note due janurary 30. On 12/31 the appropriate adjusting entry was made on 12/31. On Jan 30 the note was honored and paid in full. THe entry to record receipt of payment on Jan 30 would include a credit to:

C: Notes Receivable $2000 C: Interest Receivable $20 C: Interest Revenue $10 On 12/31 a journal entry was made to debit interest Receivable and credit interest revenue for $20

A Co. uses the allowance method to account for bad debts. Early in 2010 A CO. determined that it could not collect $400 from CRT Inc. and wrote the balance off. On Oct 21 A Co. received a check for $400 from CTR. The entries to record the receipt of cash on Oct 21 would include a debit to:

Cash & Accounts Receivable

At Period End B Co. estimates that $1200 of its accounts receivable balance is uncollectible. B Co. uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a (debit/credit) to allowance for doubtful accounts.

Credit when adjusting entry is made at period end, the allowance account is credited to increase it

At period end, B Company Estimates that $1,200 of its accounts receivable balance is uncollectible. B Company uses the allowance method to account for bad debts. THe entry to record this adjusting entry would include a debit or credit to allowance for doubtful accounts

Credit because when the adjusting entry is made at period end, the allowance account is credited to increase it

Period of Sales Method

Current Period Sales x Bad Debt % Given = Estimated Bad Debts Expense

Allowance Method: On Jan 1 we determine that we cannot collect $1000 from Mr. E, a credit customer. What's the adjusting entry? What is the impact?

D: ADA $1000 C: AR-E $1000 Impact: Nothing b/c the contra asset cancels AR out

On March 14, I Co. accepted a 180 day, 5% note in the amount of $1000 from A co., a customer. On the due date of the note A Co. dishonors the note and fails to pay. The journal entry that I co. would record on the due date would include a:

D: Accounts Receivable $1025 C: Interest Revenue $25 C: Notes Receivable $1000 When a note is dishonored the full amount due (NR + Interest) is debited to AR

Direct Write off Method: On Jan 1 we determine that we cannot collect $2000 from Mr. B, a credit customer. What is the adjusting entry and the impact it has on the balance sheet?

D: Bad Debt-Expense $2000 C: AR- Mr. B $2000 Impact: Dec assets and equity

How do we get the amount of the entry to record bad debt expense for the allowance method?

D: Bad Debts Expense C: ADA

At year end Y Co. estimates that $1500 of its accounts receivable balance is uncollectible. Y C0. uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a:

D: Bad expense C: ADA

A Co. uses the allowance method to account for bad debts. Early in 2010, A Co. determined that it could not collect $400 from CTR Inc. and wrote the balance off. On Oct 21 A co. received a check for $400 from CTR. The entries to record the receipt of cash on oct 21 would include a debit to:

D: Cash D: AR

On Jan 1, F CO. accepted a 30 day, 6% note in the amount of $5000 from B Co. a customer. On jan 31 the due date of the note, B Co. honors the note and pays in full. THe journal entry that F CO. would make to record payment of this note would include a:

D: Cash $5025 C: Interest Revenue $25 C: Notes Receivable $5000

On Jan1, F Co. accepted a 30day, 6% note in the amount of $5000 from the B Co., a customer. On Jan 31, the due date of the note, B co. honors the note and pays it in full. The journal entry that Franz would make to record payment of this note would include a:

D: Cash $5025 C: Interest Revenue $25 C:Notes Rec. $5000

On March 15 H. Co has a bank credit card sale of $1000 to a customer. The bank charges a processing fee of 2%. H Co. account is credited immediately on deposit of the credit card receipts . What's the adjusting entry on March 15

D: Cash $980 D: Credit card Expense $20 C: Sales $1000

On Nov. 1 E Co. receive a $6,000, 60 day, 6% note from a customer as payment on his $6000 account. E co's journal entry to record this transaction on Nov 1, would include a:

D: Notes Receivable $6000 C: Accounts Receivable $6000

T Co. determines a customer balance of $250 from A Co. is uncollectible. T Co. uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a (Debit/credit) to the Allowance for Doubtful Accounts

DEBIT AR is credited

T Co. determines that a customer balance of $250 from A co. is uncollectible. T Co. uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a (debit/credit) to the allowance for doubtful accounts

Debit - under the allowance method when an account is determined to be uncollectible the allowance account is debited and the accounts receivable account is credited

Period of Sales: A company has credit sales of $400,000 in 2008. Management estimates 0.5% of credit sales will eventually prove uncollectible. Existing balance in Allowance for Doubtful account is 500 credit. What's the journal entry to record Bad Debts Expense of Dec 31 2008.

Dec 31: D: Bad Debt Expense $2000 C: ADA $2000

At the end of its first year of operations, P Co. estimates that $5000 of its accounts receivable will prove uncollectible. The total accounts receivable balance on Dec 31, 2008 is $265,000. Write adjusting entry figure out the impact and NRV

Dec 31: D: Bad Debts Expense $5000 C: ADA $5000 Impact: Dec assets and equity NRV: $260,000

On Jan 1 2008, A Co. had a $25,000 balance in its AR and a credit of $5000 in its ADA. During 2008, Credit sales were $500,000 and collections from customers on account, amounted to $375,000. In addition during 2008, 2,000 of AR were written off and $1000 of previously written off AR were collected. Historically 5% of the AR ending balance is not collected. What's the adjusting entry to record Bad Debt Expense on Dec 31 2008. What's the NRV?

Dec 31: D: Bad debt expense $3400 C: ADA $3400 NRV: 140,600 (148,000-7400)

What method violates the Matching principle and why can we use it?

Direct Write off method violates matching principle but we can use it because it's acceptable on account of Materiality Principle

When a note's maker is unable or refuses to pay at maturity, the note is considered:

Dishonored - not Uncollectible because although the note has been dishonored, they may still pay on the note after the note plus interest has been put back into the accounts receivable

On March 15 H. Co has a bank credit card sale of $1000 to a customer. The bank charges a processing fee of 2%. Patient has to wait before payment is received from the credit card company. What's the adjusting entry on March 15 and March 25

March 15: D: AR- Credit Card CO. $980 D: Credit card expense $20 C: Sales $1000 March 25: D: Cash $980 C: AR: Credit Card Co. $980

Interest Computation Formula

Principal of the note x annual interest rate x time expressed in years (days/360) = interest

The Expected proceeds from accounts receivable, determined by taking accounts receivable less the allowance for doubtful accounts is called:

Realizable Value

Allowance Method: On Jan 1 we determine that we cannot collect $1000 from Mr. E, a credit customer. If Mr. E agrees to pay $600 on Feb 15 what is the adjusting entry?

Reinstate Account: Feb 15 D: AR-E $600 C: ADA $600 Record Payment: D: Cash $600 C: AR-E $600

Direct Write off Method: On Jan 1 we determine that we cannot collect $2000 from Mr. B, a credit customer. Say On April 1 Mr. B decides to pay $500. write the adjusting entry

Reinstate the Account (flip write off entry): D: AR-Mr. B $500 C: Bad Debt Expense $500 Record Receipt of Payment: D: Cash $500 C: AR- Mr. B $500

Maker

The person to whom the note is Payable; person who gets $$$

Payee

The person who signed the note and promised to pay at maturity

XYZ Company accepted a $10,000 90 day 8% Note Receivable from ABC Co, dated march 1 as extension of time for an existing AR from ABC Co. If ABC doesn't pay the not or the interest on May 30, record dishonor

To Record Dishonor: 5/30 D: AR $10,200 C: IR $200 C: NR $10,000

XYZ Company accepted a $10,000 90 day 8% Note Receivable from ABC Co, dated march 1 as extension of time for an existing AR from ABC Co. Record note, due date and settlement

To Record Note: 3/1 D: NR$10,000 C: AR $10,000 To Record Settlement: 3/30 D: Cash $10,200 C: Interest Revenue $200 C: Notes Receivable $10,000 Due Date: May 30

Desired Ending Balance of ADA Formula

Year end AR x Bad Debt % (Given) = Desired Ending Balance of ADA - only for allowance method

The advantages of using the allowance method to account for bad debits include which of the following? (Check all that apply) a) Matches expenses with related sales b) Requires no accounting estimates c) Reports accounts receivable balance at net realizable value

a & c

The [Blank] method of estimating bad debts uses both past and current receivables information to estimate the allowance account. Specifically each receivable is classified by how long its past its due date

aging of receivables

When a note receivable is outstanding at the end of an accounting period the company must prepare:

an adjusting entry to accrue interest income

An accounts receivable ledger: (Check all that apply) a) is necessary only when a company doesn't keep a general ledger b) records journal entries that affect accounts receivable c) is a supplementary record to maintain an account for each customer

b & c

What kind of account is Allowance for Doubtful Accounts (ADA)

contra asset to offset Accounts receivable.

Net Realizable Value (NRV)

estimated amount of cash to be collected when AR are reported on the balance sheet NRV= AR - ADA