Principles of Accounting Module 7 Assets: Receivables

A company sells a furniture set to a customer for $2,700. The customer has an approved credit line with the company of $5,000, which the customer uses to pay for the furniture set. The customer is required to pay for the furniture set within 90 days. How should this purchase be recorded in the company's accounts receivable ledger? $2,700 credit $5,000 credit $2,700 debit $5,000 debit

$2700. The company records the sale of the furniture set with a $2,700 debit to the accounts receivable ledger.

Hunt Company estimates uncollectible accounts using the percentage-of-receivables method and expects that 5 percent of outstanding receivables will be uncollectible for 20XX. The balance in Accounts Receivable is $200,000, and the allowance account has a $3,000 credit balance before adjustment at year-end. The uncollectible accounts expense for 20XX will be __________. $7,000 $13,000 $10,000 $9,850

$7000/ The uncollectible accounts expense for 20XX is computed as follows: Allowance balance after adjustment ($200,000 X 0.05) $10,000 Balance before adjustment (3,000) Uncollectible accounts expense $7,000

A customer returns damaged clothing to the seller. The clothing was sold to the customer for $80, cost of goods sold was $50, and sales tax charged on the original sale was $7. What is the amount debited to the Sales Returns and Allowances account in the seller's general journal? $130 $80 $57 $87

$80. The seller should record the amount that the clothing was originally sold for, $80, as a debit to the Sales Returns and Allowances account.

direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

accounts receivable ledger

A subsidiary ledger containing only accounts for charge (on account) customers

How does the direct write-off method violate the GAAP matching principle? In most cases, companies do not know that a customer cannot pay during the accounting period the revenue is recorded. Because the bad debt, or uncollectible accounts, are estimated. This method recognizes uncollectible accounts expense in advance of identifying which accounts are uncollectible. Because receivables are stated at net realizable value on the balance sheet.

A. In most cases, companies do not know that a customer cannot pay during the accounting period the revenue is recorded, so when using this method, the uncollectible accounts are not recorded during the same period the revenue is recorded.

A company currently has $1,000 in Accounts Receivable (A/R) on the balance sheet and has a history of 20% of accounts being uncollectible. It has determined that $100 in sales previously recorded to a customer are uncollectible. Under the direct write-off method, what would be the proper journal entry? Debit uncollectible accounts expense $100, credit A/R $100. Debit A/R $100, credit uncollectible accounts expense $100. Debit uncollectible accounts expense $200, credit A/R $200. Debit uncollectible accounts expense $200, credit revenue $200.

A. This records uncollectible accounts expense to the income statement while reducing the A/R balance by the amount being written off of $100.

In cases where previously written off accounts are recovered, the company reverses the original write-off entry and reinstates the account by debiting __________and crediting ________________ for the amount received. It posts the debit to both the general ledger account and to the customer's accounts receivable subsidiary ledger account. The firm also records the amount received as a debit to ________ and a credit to Accounts Receivable.

Accounts Receivable, Allowance for Uncollectible Accounts Cash

What is a purpose of aging schedules? All of the above Changes in credit policies Cash management Financing needs

All of above.

accounts receivable

Amounts to be received in the future due to the sale of goods or services

Which statement is false? The percentage-of-receivables method may use either an overall rate or a different rate for each age category. A write-off of an account reduces the net amount shown for accounts receivable on the balance sheet. The Allowance for Uncollectible Accounts reduces accounts receivable to their net realizable value. Any existing balance in the Allowance for Uncollectible Accounts is ignored in calculating the uncollectible accounts expense under the percentage-of-sales method, except that the allowance account must have a credit balance after adjustment.

B. A write-off of an account receivable results in a debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable for the same amount. The net amount (accounts receivable minus allowance for uncollectible accounts) does not change.

What is not a benefit of the aging schedule? Gives the company a better basis for estimating the total amount of uncollectible accounts. Provides details about the allowance account. Helps identify certain accounts that should be written off as uncollectible. May suggest the need for changes in credit policies.

B. The aging schedule is used in preparation of the adjustment for uncollectible account expense and does not necessarily provide any other details about the amounts in the allowance account.

Your company has an accounts receivable on its books on October 31 from a customer, Jones Corporation, in the amount of $1,000. On November 15, 15-days later, your company is advised that Jones Corporation has now been judged to be in bankruptcy in a court of law, and any creditors of Jones Corporation, including your company, will not be paid any amounts they are owed by Jones Corporation. Using the Allowance Method, which of the following journal entries is correct with regards to accounting for the Jones Corporation transaction that must be recorded on the books on November 15? Debit Uncollectible Accounts Expense 1,000 Debit Allowance for Uncollectible Accounts 1,000, credit Accounts Receivable 1,000 Debit Uncollectible Accounts Expense 1,000, credit Allowance for Uncollectible Accounts 1,000 Debit Accounts Receivable 1,000, credit Allowance for Uncollectible Accounts 1,000

B. Using the Allowance Method, the Allowance for Uncollectible Accounts is always charged (debited) when a specific customer account becomes uncollectible, and Accounts Receivable is credited for the same amount.

A company allows established customers to make purchases on credit. The company has estimated that 5% of these credit sales accounts will eventually go unpaid. The company posted sales of $350,000 including $145,000 on credit last year. Which adjusting entry is required to record the estimated expense from uncollectible accounts using the percent of net sales method? Debit $17,500 to Allowance for Doubtful Accounts, credit $17,500 Uncollectible Accounts Expense Debit $17,500 Uncollectible Accounts Expense, credit $17,500 Allowance for Doubtful Accounts Debit $7,250 Uncollectible Accounts Expense, credit $7,250 to Allowance for Doubtful Accounts Debit $7,250 to Allowance for Doubtful Accounts, credit $7,250 Uncollectible Accounts Expense

C (Use only credit sales) The estimated uncollectible accounts expense is $145,000 of credit sales times 5%, or $7,250. The correct entry to record uncollectible accounts expense is debit Uncollectible Accounts Expense and credit Allowance for Doubtful Accounts.

Which type of account described below best describes the characteristics of the Sales Returns and Allowances Account? Contra-liability account Contra-equity account Contra-revenue account Contra-asset account

Contra-revenue account. Sales Returns and Sales Allowances are both contra-revenue accounts—in other words, Sales Returns and Allowances are reductions of revenues, one for Returns made by customers where the customer receives a refund or a credit, and the other, Allowances, where the customer gets a reduction in the original price paid for merchandise.

The percentage of estimated uncollectible balances for an account is usually greater in accounts with outstanding balances that are 0-30 days than for accounts that have balances 60+ days. True or False

Correct! The percentage estimated as uncollectible increases as days the account is outstanding increases.

Which method of recording uncollectible debts adheres to the matching principle by deducting expenses incurred in producing revenues from those revenues during the accounting period? Allowance method Direct write-off method Accrual method Uncollectible accounts expense method

The allowance method of recording uncollectible accounts adheres to this principle by recognizing the uncollectible accounts expense in advance of identifying specific accounts as being uncollectible.

You shop at a store today and pay $75 cash for a new winter jacket. You live in a state where there is no sales taxes. You take the winter jacket home, try it on again, and decide to return the winter jacket back to the store. Which of the following is the correct entry made by the store when you return the winter jacket to the store and receive a full refund for your original purchase? Debit Cash 75, credit Sales Returns 75 Debit Sales Returns 75, credit Cash 75 Debit Cash 75, credit Revenues 75 Debit Sales Returns 75, credit Accounts Receivable 75

Debit Sales Returns (-SE) 75, credit Cash (-A) 75

Assume that the customer has already PAID the account and the seller gives the customer a cash refund. Now, the credit is to Cash rather than to Accounts Receivable. If the customer has taken a 2 percent discount when paying the account, the company would return to the customer the sales price less the sales discount amount. For example, if a customer returns goods that sold for $300, on which a 2 percent discount was taken, the following entry would be made: Same entry would be made for a return of damaged goods & customer already PAID for it.

Debit Sales Returns and Allowances (-SE) $300 Credit Cash (-A) $294 Credit Sales Discount (+SE) $6

Assume that a customer returns $300 of goods sold on account. If payment has NOT yet been received, the required entry is: This is the same entry if there was a return for damaged items in which customer has NOT yet PAID the bill.

Debit Sales Returns and Allowances (-SE) $300 Credit A/R (-A) $300

The percentage-of-receivables method estimates uncollectible accounts by determining the past value of the Allowance for Uncollectible Accounts. True or False

False. The percentage-of-receivables method estimates uncollectible accounts by determining the desired size of the Allowance for Uncollectible Accounts.

The percentage-of-sales method estimates the uncollectible accounts from the ending balance in Accounts Receivable. True or False

False. The percentage-of-sales method estimates the uncollectible accounts from the net credit sales or net sales of a given period.

Allowance for Uncollectible Accounts is a liability. True or False

False. This would appear as an offset to A/R in the asset section.

Under the allowance method, uncollectible accounts expense is recognized when a specific customer's account is written off. True or False

False. Uncollectible accounts expense is recognized at the end of the accounting period in an adjusting entry.

A company extended credit to one of their customers whereby the net amount is due 30 days from the date of delivery. The customer has used the credit extended to them to buy 100,000 hinges that cost $1 each. To account for this transaction, how should the payment from the customer be recorded by the company? It should be recorded as a debit to Customer Expense and a credit to Accounts Receivable. It should be recorded as a debit to Cash and a credit to Accounts Receivable. It should be recorded as a debit to Cash and a credit to Accounts Payable. It should be recorded as a debit to Accounts Payable and a credit to Cash.

It should be recorded as a debit to Cash and a credit to Accounts Receivable.

Last week, you purchased a toy for your child and paid $50 cash for the toy plus 10% sales tax. The store, at that time, recorded the sale and the sales tax payable on its books. After showing the toy to your spouse, you decided to return the toy back to the store and get a full refund. Which accounts on the books of the store is not affected by the return of the toy to the store? Cash Office Supplies Expense Sales Returns and Allowances Sales Taxes Payable

Office Supplies Expense The store would make the following entry: debit Sales Returns and Allowances 50, debit Sales Taxes Payable 5, credit Cash 55.

aging of accounts receivable

Process of classifying accounts receivable by how long they are past due for purposes of estimating & identifying uncollectible accounts.

On November 15, your company wrote off a receivable from Williams Corporation using the Allowance Method in the amount of $5,000. Six months later, a check arrived in the mail from Williams Corporation in the amount of $3,000 in partial payment of the above receivable, which was previously written off. Two journal entries are required to record this recovery of the receivable on your company's books. Which of the accounts below are not impacted by those two journal entries? Accounts Receivable Revenues Cash Allowance for Uncollectible Accounts

Revenues

Using the percentage-of-sales method, uncollectible accounts expense is matched against what? Liabilities on the balance sheet Expenses of the accounting period Long-term assets on the balance sheet Revenues of the accounting period

Revenues of the accounting period. The debit to Uncollectible Accounts Expense brings about a matching of expenses and revenues on the income statement; uncollectible accounts expense is matched against the revenues of the accounting period.

You buy a new business suit and pay $250 cash for it. When you bring the business suit home and try it on again, you notice a small flaw in the suit. However, you really like the suit, it fits you perfectly, and you decide to go back to the store and ask for a small ($25) credit refund due to the small flaw, which you show them exists on the suit. Which accounts would be affected when the store records the cash refund that they pay to you related to the flaw in the business suit? Accounts Payable Salary Expense Accounts Receivable Sales Allowances

Sales Allowances. The Sales Allowances account, a contra-revenue account, is used by businesses like the store's to track Sales Allowances given to customers (in this case, in the form of a $25 cash refund) for merchandise with minor flaws in it returned by customer.

If a customer goes bankrupt and is unable to pay their outstanding balance, it would reduce the net realizable value of accounts receivable. True False

This is true because less cash is expected to be collected.

Accounts receivable are amounts that customers owe a company for goods sold and services rendered on account. True or false.

True

Bank credit card sales are treated as cash sales because the receipt of cash is certain. T or F

True

The percentage-of-sales method focuses on the income statement and the relationship of uncollectible accounts to sales. True False

True! The percentage-of-sales method focuses on the income statement and the relationship of uncollectible accounts to sales. The percentage of sales determined by the company would be multiplied by the credit sales to determine the estimate uncollectible account expense.

A company that estimates uncollectible accounts receivables under the allowance method makes an adjusting entry at the end of each accounting period. It debits _________________, sometimes called Bad Debt Expense, thus recording the operating expense in the proper period. The credit is to an account called___________________ .

Uncollectible Accounts Expense Allowance for Uncollectible Accounts

We classify uncollectible accounts expense as a ___________ expense because it results from _______ sales.

selling expense, credit

Under the accrual basis, a merchandising company that extends credit records _____________when it makes a sale because at this time it has _________________ the revenue.

accounts receivable earned and recognized. This follows the revenue recognition principle that guides us to record revenue when earned (to recognize the revenue) and not when cash is received. The company has recognized the revenue because it has received the customer's promise to pay in exchange for the goods. This follows the revenue recognition principle that guides us to record revenue when earned (to recognize the revenue) and not when cash is received.

The percentage-of-receivables method also known as ___________may use either an overall rate or a different rate for each age category. The percentage of receivables only uses the percentage of the current balance of receivables to calculate the adjustment. The amount calculated using the percentage of receivables is the ending balance in the allowance account and should be used to calculate the adjusting entry. The percentage of receivables is not the adjustment amount, it is the new balance

aging of accounts receivable method

The __________________ method provides in advance for uncollectible accounts. The ________________method recognizes bad accounts as an expense at the point when judged to be uncollectible and is the required method for federal income tax purposes.

allowance, direct write off

This module discusses receivables. Receivables are _________. Receivables are any sum of money due to be paid to that company from any party for any reason. Primarily, receivables arise from the sale of ____________. The two types of receivables in this module are: accounts receivable, which companies offer for short-term credit with no interest charge, and _________ receivable, which companies sometimes extend for both short- and long-term credit with an interest charge.

assets goods and services. notes

To illustrate the adjusting entry for uncollectible accounts, assume a company has $100,000 of accounts receivable and estimates its uncollectible accounts expense for a given year at $4,000. The required year-end adjusting entry is:

debit Uncollectible Accounts Expense (bad debt exp) (-SE) credit Allowance for Uncollectible Accounts (-A)

Percentage-of-receivables method

is a balance sheet approach to bad debts estimation. It calculates bad debts as a percentage of ending accounts receivable. This is usually done using a procedure called aging of accounts receivable.

net realizable value of accounts receivable

is the amount the company expects to collect from accounts receivable after uncollectible accounts are taken into consideration.

The allowance method of recording uncollectible accounts adheres to the ______________________ by recognizing the uncollectible accounts expense in advance of identifying specific accounts as being uncollectible. How do we debit and credit it ?

matching principle Debit bad debt expense, credit allowance for doubtful accounts

The Allowance for Uncollectible Accounts reduces accounts receivable to their __________ value. The allowance for uncollectible accounts should be subtracted from the accounts receivable balance in order to show the Accounts Receivable balance at Net Realizable Value which follows the principle of conservatism, that we report our assets at the lowest and our liabilities at the highest amounts.

net realizable

Accountants use two basic methods to estimate uncollectible accounts for a period.

percentage of sales method percentage of accounts receivable method

Any existing balance in the Allowance for Uncollectible Accounts is ignored in calculating the uncollectible accounts expense under the ________________method, except that the allowance account must have a credit balance after adjustment. The adjustment for the percentage-of-sales is a direct percent of sales that is added to the current balance of the allowance account.

percentage-of-sales

As a contra account to the Accounts ___________ account, the Allowance for Uncollectible Accounts reduces accounts _____________ to their net realizable value.

receivable, receivable

trade receivables

receivables amounting from credit sales of goods or services