Chapter 7 Practice
What is the normal journal entry when writing-off an account as uncollectible under the allowance method?
Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
Moon Inc. assigns $4,500,000 of its accounts receivables as collateral for a $3 million loan with a bank. The bank assesses a 3% finance charge on the loan amount and charges interest on the note at 6%. What would be the journal entry to record this transaction?
Debit Cash for $2,910,000, debit Interest Expense for $90,000, and credit Notes Payable for $3,000,000.
Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
Improved matching of bad debt expense with revenue.
Sun Inc. factors $6,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. What would be recorded as a gain (loss) on the transfer of receivables?
Loss of $300,000. For sale of receivables without recourse: loss = finance charge = 6,000,000 x .05 = 300,000
Sun Inc. factors $6,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $300,000. What would be recorded as a gain (loss) on the transfer of receivables?
Loss of $480,000. For sale of receivables with recourse: loss = finance charge + recourse liability = 6,000,000 x .03 + 300,000 = 480,000
Under which section of the balance sheet is "cash restricted for plant expansion" reported?
Non-current assets.
Which of the following is true when accounts receivable are factored without recourse?
The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
a deduction from sales in the income statement.
On July 22, Peter sold $23,500 of inventory items on credit with the terms 2/15, net 30. Payment on $15,000 sales was received on August 1 and the remaining payment was received on August 12. Assuming Peter uses the gross method of accounting for sales discounts, which one of the following entries was made on August 1 to record the cash received?
a. Cash 14,700 Sales Discount 300 Accounts Receivable 15,000
On April 2, Kelvin sold $40,000 of inventory items on credit with the terms 1/10, net 30. Payment on $24,000 sales was received on April 8 and the remaining payment on $16,000 sales was received on April 27. Assuming Kelvin uses the net method of accounting for sales discounts, the entry recorded on April 27 would include a:
debit to Cash for $15,840 and credit to Sales Discounts Forfeited for $160.
All of the following may be included under the heading of "cash" except
money market funds
The accounts receivable turnover measures the
number of times the average balance of accounts receivable is collected during the period.
Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 6% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?
$ 378,000. Target balance = 6,500,000 x .06 = 390,000 BDE = Target balance - Unadjusted credit balance of Allowance = 390,000 - 12,000 = 378,000
Moon Inc. factors $3,000,000 of its accounts receivables without recourse for a finance charge of 4%. The finance company retains an amount equal to 8% of the accounts receivable for possible adjustments. Moon estimates the fair value of the recourse liability at $300,000. What would be the debit to Cash in the journal entry to record this transaction?
$2,640,000. Journal entry: Cash x Due from factor (3,000,000 x .08) 240,000 Loss on sale of Rec. (3,000,000 x .04) 120,000 Accounts Receivable 3,000,000 x = 3,000,000 - 240,000 - 120,000 = 2,640,000
AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue?
$24,750.
Becky had net sales (all on account) in 2020 of $8,000,000. At December 31, 2020, before adjusting entries, the balances in selected accounts were: accounts receivable $1,000,000 debit, and allowance for doubtful accounts $2,000 debit. Becky estimates that 3% of its accounts receivable will prove to be uncollectible. What is the net amount expected to be collected of the receivables reported on the financial statements at December 31, 2020?
$970,000 Target balance of Allowance = 1,000,000 x .03 = 30,000 Net realizable value of accounts receivable = Receivable - Allowance = 1,000,000 - 30,000 = 970,000
