Chapter 7 Accounting Set

Companies weigh at least two concepts when considering use of the direct write-off method

(1) Expense recognition: requires expenses be reported in the same period as the sales they produce. (2) Materiality constraint: permits use of the direct write-off method.

Two most common receivables

1. Accounts receivable 2. Notes receivable

Two methods for uncollectible accounts

1. Direct write-off method 2. Allowance method

Disadvantages of allowance method

1. Estimates needed

Method 1. Direct Write-off 2. Allowance

1. In future, when accounts are uncollectible 2. Currently, using estimated uncollectibles

True or false: The allowance method advantages

1. It records estimated bad debts expense in the period when the related sales are recorded and 2. It reports accounts receivable on the balance sheet at the estimated amount to be collected

Direct Write Off (Disadvantages)

1. Receivables and income temporarily overstated 2. Bad debts expense often not matched with sales

Allowance method advantages

1. Receivables fairly stated 2. Bad debts expense matched with sales 3. Writing off bad debt does not affect net receivables or income

2 Methods to convert receivables to cash

1. Selling them 2. Pledging them

Direct Write Off (Advantages)

1. Simple 2. No estimates needed

4 Reasons Sellers Allow Customers to Use Credit Cards and Debit Card

1. The seller does not have to decide who gets credit and how much 2. The seller avoids the risk of customers not paying (this risk is transferred to the card company) 3. The seller typically receives cash from the card company sooner than had it granted credit directly to customers 4. More credit options for customers can lead to more sales

True or false: We treat a year as having 365 days for interest computations in examples and assignments

False; 360

Accounts Rec. Turnover

Net Sales/Avg. Accts. Rec. (Beg. Bal. + End Bal)/2

Interest formula

P*R*T

Percent of sales

Sales*Rate=Bad debt expense

True or false: Accounts receivable turnover should be high versus low. Therefore, receivables are turning into cash quickly.

True

True or false: Bad debts expense is estimated under the allowance method

True

True or false: Companies convert receivables to cash before they are due if they need cash or do not want to deal with collecting receivables. This is usually done by (1) selling them or (2) using them as security for a loan (pledging them).

True

True or false: Credit sales are recorded by increasing (debiting) accounts receivable

True

True or false: For the allowance method, we use estimated losses because when sales occur, sellers do not know which customers will not pay. At the end of the period, the allowance method requires an estimate of the total bad debts expected from that period's sales.

True

True or false: The seller pays a fee when a card is used by the customer, often ranging from 1% to 5% of card sales. This fee reduces the cash received by the seller.

True

True or false: The write-off does not affect the realizable value of accounts receivable; Neither total assets nor net income is affected by the write-off of a specific account. Instead, both assets and net income are affected in the period when bad debts expense is predicted and recorded with an adjusting entry.

True

True or false: To a borrower interest is an expense. To a lender it is revenue

True

True or false: When a company directly grants credit to customers, it expects some customers will not pay what they promised. The accounts of these customers are uncollectible accounts, or bad debts. Uncollectible accounts are an expense of selling on credit.

True

True or false: When a note is dishonored, then we remove the amount of this note from notes receivable and charge it to an account receivable from its maker.

True

True or false: When selling receivables, the seller is charged a factoring fee b/c they get the cash and pass on the risk to the buyer (factor).

True

True or false: When writing off bad debt using the allowance method; specific accounts become uncollectible, they are written off against the Allowance for Doubtful Accounts.

True

True or false: a company can borrow money by pledging its receivables as security for the loan. If the borrower defaults on (does not pay) the loan, the lender is paid from the cash receipts of the receivables.

True

True or false: the allowance for doubtful accounts is contra asset account for receivables

True

True or false: the general ledger has a single accounts receivable account called a control account

True

Supplementary record

a supplementary record has a separate account for each customer and is called the accounts receivable ledger or accounts receivable subsidiary ledger.

Aging of receivables

accounts receivable (by age)*rates(by age)=allowance for doubtful accounts

Percent of receivables

accounts receivable*rate=allowance for doubtful accounts

Percent of accounts receivable method

also called a balance sheet method, assumes that a percent of a company's receivables is uncollectible

Aging of accounts receivable method

also called the balance sheet method, is applied like the percent of receivables method except that several percentages are used to estimate the allowance.

Accounts receivable

amounts due from customers for credit sales; backed by the customer's general credit standing

The percent sales method or income statement method

assumes that a percent of credit sales for the period is uncollectible

Other receivables

include interest receivable, rent receivable, rent receivable, tax refund receivable, and receivables from employees

A receivable

is an amount due from another party

Direct write-off method

records the loss from an uncollectible account receivable when it is determined to be uncollectible.

True or false: The allowance method for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.

true

Notes receivable

usually recorded in a single notes receivable account to simplify record-keeping

Installment accounts (or finance) receivable

which are amounts owed by customers from credit sales for which payment is required in periodic amounts

Promissory note

written promise to pay a specified amount either on demand or at a definite future date; it is a note receivable for the lender but a note payable for the lendee.