Accounting Ch 5

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

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

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

Accounts receivable has a $2,300 balance, and the Allowance for Doubtful accounts has a $200 credit balance. An $80 accounts receivable is written off. Net receivables (net realizable value) after the write-off equals:

$2,100

Prime Corp has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net realizable value of accounts receivable?

$93,000

What are the financial statement effects of recording bad debt expense using the allowance method?

-Decrease assets -Increase expenses

Net realizable value of accounts receivable

-Gross accounts receivable less allowance for doubtful accounts -Accounts receivable should be reported at the amount of cash the firm expects to collect.

Difference between total accounts receivable and the allowance for uncollectible accounts is referred to as...

-Net accounts receivable -Net realizable value

Receivables

-Tax refund claims -Amounts owed by customers -Amounts loaned and expected to be repaid -Interest due from loans to customers -Loans by a company to other entities

The direct write-off method is normally not permitted for U.S. GAAP reporting b/c if related credit sales occurred in the prior year, it:

-overstates net income and assets in the prior year

Two entries are required when a previously written off account is paid. These two entries include...

1. Record collection on the account receivable 2. Reinstate the account receivable

Two entries are required when previously written off account is paid. These two entries include...

1. Record collection on the account receivable 2. Reinstate the account receivable

Payment for credit sales are typically due in ____ to _____ days

30, 60

Sales Discount

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay withing a specified period of time.

The account "Allowance for Uncollectible Accounts" is classified as...

A contra asset to accounts receivable

Uncollectible account (bad debt)

A customer account that is not expected to be collected.

Allowance

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations

The first step in using the percentage-of-receivables approach to estimate bad debts is to calculate the desired ending balance in which account?

Allowance for uncollectible accounts

Accounts Receivable

Cash owed to company by its customers from sales or services on account Recorded at time of sale/service Also called Trade Receivables Companies record an asset (accounts receivable) and revenue when they sell products/services to their customers on account, expecting payment in the future.

At the end of the year, companies must record estimated contra revenue for estimated sales returns and allowances and sales discounts pertaining to...

Current year sales only

Sales Allowance

Customer receives partial refund of the sales price after customer discovers flaw in the merchandise. The customer keeps the merchandise.

A _____ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low.

Debit

The allowance method is a method of accounting that ________ net accounts receivable (as well as net income) for estimated bad debts.

Decreases

Which method of accounting requires recognizing bad debt expense when it is determined that the customer cannot pay?

Direct write-off method

Not Receivable

Formal credit arrangement between borrower and lender

The allowance method is required consistent under...

GAAP

Account Receivable

Informal credit agreement with trade customers

Interest on a Note formula

Interest = face amount x annual rate x fraction of annual period

When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?

Make an adjusting entry at the end of the current period to accrue the interest earned

Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet?

No effect on total assets

Getting 3 year note receivable from a customer for goods sold

Noncurrent asset

Some company estimates that $4000 worth of merchandise sold during current year will still be returned by customers during the subsequent year. The company must...

Record estimated returns at the end of the year

Bad Debt Expense

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year.

The process of estimating an allowance for uncollectible accounts, writing off bad debts in the following periods, and then reestimating the allowance at the end of the period occurs...

Throughout the company's life

The allowance method estimates...

Uncollectible accounts

Income Statement Approach to measuring bad debts

Using a percentage of each period's net credit sales to estimate bad debt expense.

With the allowance method, bad debt expense is recorded...

at the end of the period when bad debts are estimated

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to...

be more accurate

An account receivable is normally classified as a...

current asset

A disadvantage to selling on account is...

customers do not always pay

The accounts receivable account is reduced when the seller

determines that a specific customer account will not be collectible

At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the...

estimate of uncollectible accounts was too high.

A sales allowance _____ the amount owed by the customer for merchandise that is _____ by the customer

increased; retained

Companies extend credit to customers and sell goods on account because...

it increases sales

The adjusted balance of the Allowance for Uncollectible Accounts is equal to the estimate of uncollectible accounts at the end of last year______ actual write-offs during the _____ year.

less; current

The percentage-of-receivables approach to measuring bad debt expense focuses on..

net realizable value of accounts receivable

The purpose of recording an allowance for uncollectible accounts is to...

report accounts receivable at net realizable value

Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are:

susceptible to management manipulation

For accounts receivable, the longer an account is outstanding...

the more likely it will prove uncollectible

When the direct write-off method is used, an entry for bad debt expense is required...

when the account receivable is determined to be uncollectible

A company who tries to increase current-year income by manipulating bad debt expense could achieve this obj by intentionally...

Underestimating uncollectible accounts

Credit Sales

When business sells goods to a customer, and the customer promises to pay later. Also known as sales on account or services on account. Common for many business transactions

Sales Return

-When merchandise is returned for a refund or for credit to be applied to other purchases. -Customer returns merchandise purchased during the month and receives refund of full sales price.