accouting chapter 5

The allowance method estimates

uncollectible accounts

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

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

Correct Answer record the collection on the account receivable reinstate the account receivable

On September 1, Year 1, Dallas Corporation accepts a $30,000 six-month, 12 percent promissory note from one of its clients. The year-end adjustment to accrue interest revenue on December 31, Year 1 will include a _____.

$1,200 credit to Interest Revenue

The allowance method is required by

GAAP

Delta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Delta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

No impact on the accounting equation

A trade discount is

a percentage reduction from list price.

Trade discounts represent:

a reduction in the listed price of a good or service

Net credit sales for Turner Company are $200,000 for the year and the average accounts receivable balance is $20,000. What is the company's average collection period?

average collection period=365 days/receivables turnover ratio 200,000/20,000=10 receivable turnover ration answer= 365/10= 36.5

On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:

debit to Sales Returns

Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts:

decrease total assets and decrease net income.

Receivables not expected to be collected should

not be counted in assets of the company.

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note receivable

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

receivable turnover ratio average collection period

During its first year of operations, Ellison, Inc. bills customers $18,000 for the services it provided. At the end of the year, $6,000 remains due from customers. The company's credit manager estimates that 10% of the total year-end accounts receivable will not be collected. The company's estimate of uncollectible accounts is:

$600

On January 1, Year 1, Alpha Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?

10,000 x 9% x 3/12= $225

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 accounts receivable balance?

100,000-7,000=93,000

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

As a noncurrent asset

Beta Corporation wrote off $100,000 due from a specific client in March. However, this client was able to make a partial payment of $15,000 in June. Recording this cash collection will involve all of the following accounts except:

Bad Debt Expense

How are trade discounts recognized?

By recording the sale at a discounted price

Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.

Cash; Accounts Receivable

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

A company will debit ___________ when recording a credit sale.

accounts receivable

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as

accounts receivable

a_______is the legal right to receive cash from a credit sale and represents an asset of the company.

accounts receivable

The allowance for uncollectible accounts is a contra account to

accounts receivable.

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the __ method of accounts receivable.

aging

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 is referred to as a sales

allowance

Sales Returns is an example of a(n) ____________ account, which is used to keep a record of reductions from revenue due to sales returns separate from total revenue itself.

contra revenue

The account "Allowance for Uncollectible Accounts" normally has a ___ balance

credit

According to the allowance method, writing off an account receivable will include a:

credit to Accounts Receivable

On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a:

credit to Accounts Receivable

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 24. The receipt of payment will include a:

credit to Accounts Receivable for $1,000

During its first year of operations, Kimbrough Corporation sold $14 million worth of goods on account. At the end of the year, $5 million remains due from customers. If the company estimates that 20% of the total year-end accounts receivable will not be collected, it will record a:

credit to Allowance for Uncollectible Accounts for $1 million

On September 1, Year 1, Sigma Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, Year 2, the maturity date, will involve all of the following except a _____.

credit to Interest Revenue for $4,500

The journal entry to record bad debt expense includes:

credit to allowance for uncollectible accounts debit to bad debt expense

Using the aging method, Carlton Company calculates the estimated ending balance in the Allowance for Uncollectible Accounts to be $12,000. Prior to adjusting entries, the Allowance for Uncollectible Accounts has a credit balance of $3,000. The year-end adjustment would include a:

debit to Bad Debt Expense for $9,000

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 6. The receipt of payment will include a:

debit to Cash for $980

On January 1, Year 1, Boyd Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. To record acceptance of the note, the company will record a:

debit to Notes Receivable for $10,000

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

decreases; retained

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.

future,current

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

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

Under the allowance method, the write-off of accounts receivable:

has no effect on total assets or net income.

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) _____ approach to measuring bad debts. (

income statement

Net credit sales for Winner Company are $100,000 for the year. The Accounts Receivable account had a balance of $15,000 at the beginning of the year and $25,000 at the end of the year. What is the company's receivables turnover ratio?

receivables turnover ratio=net credit sales/average accounts receivable 100,000/20,000(15,000+25,000=40,000/2=20,000)=5.0

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

sales on account. credit sales.

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales return

The entry to write-off uncollectible accounts results in a reduction in total assets when using:

the direct write-off method.

A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:

Sales Discounts for $24

The percentage increase in receivables for Petro Corporation is greater than the percentage increase in sales. Which of the following conclusions can be drawn from this information?

The average collection period will increase

Writing off an account receivable using the direct write-off method includes a debit to:

bad debt expense

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

be more accurate.

At the end of Year 1, Fulton Corporation estimates uncollectible accounts to be $10,000. Actual bad debts during Year 2 totaled $12,000. This indicates that management's estimate of uncollectible accounts in Year 1 was:

too low