Chapter 8 ACC Learnsmart: Receivables, Bad Debt, and Interest Revenue

A company lends $1,000 to two employees at a rate of 6% on December 1. One employee is to repay the note in 3 months and the other in 6 months. At December 31, how much interest will the company accrue?

$10

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a _____.

debit to Bad Debt Expense of $1000 and credit to Allowance for Doubtful Accounts of $1000

Using the aging approach, management estimates that $1000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a _____.

debit to Bad Debt Expense of $900 and credit to Allowance for Doubtful Accounts of $900

On March 1, Scents, Inc. lent $1000 to an employee at a rate of 6% for 3 months. Cents' entry to record the loan of $1000 to its employee includes a ______.

debit to Notes Receivable of $1000 and credit to Cash of $1000

Collection of a previously written-off account is called a(n) ______.

recovery

A sales on account is recorded with a debit to ____ _____ and a credit to _____ ______.

Accounts Receivable and Sales Revenue

A sale on account is recorded with a debit to _____ ______ and a credit to _____ ______.

Accounts receivable and Sales revenue

What would be the effect of forgetting to record the adjusting entry for estimated bad debts?

Assets and stockholders equity would be overstated

The adjusting entry to record the estimated amount of bad credit sales is a debit to ___ ____ _____ and a credit to Allowance for Doubtful Accounts.

Bad Debt Expense

Rank Companies A-C based on how favorable their receivables turnover ratio is (from most favorable on the top to the least favorable).

Company B: 5.6 times Company A: 3.4 times Company C: 2.4 times

Sales on account will cause an increase in _____.

Sales Revenue on the income statement and Accounts Receivable on the balance sheet

Removing an uncollectible account and its corresponding allowance from the accounting record is called_____.

a write-off

If the Allowance for Doubtful Accounts was debited, what account was credited?

accounts receivable

A(n) _____ of accounts receivables method is based on the amount of days the receivables have been unpaid. When determining the desired amount of the Allowance for Doubtful Accounts, the older receivables are assigned a higher percent than newer ones.

aging

The direct write-off method does not require the _____ account.

allowance for doubtful accounts

Which of the following is contra-asset account?

allowance for doubtful accounts

Accounts Receivable represent ____.

amounts owed to a business by its customers

When a company lends money to employees at a rate of 4%, the company will record ____.

an asset called Notes Receivable

The challenge businesses face when estimating the allowance for previously recorded sales is that _____.

at the time of the sale, it is not known which particular customer will be a "bad" customer

The journal entry for the direct write-off method includes a ____.

credit to Accounts Receivable and debit to Bad Debit Expense

The journal entry to record $5.6 million in sales on account includes a ____.

credit to Sales of $5.6 million and debit to Accounts Receivable of $5.6 million

ABC Corp. received a 3 month, at 8% per year, $1500 note receivable on November 1. The adjusting entry on December 31 will include a _____.

credit to interest Revenue of $20

The journal entry to record $5.6 million in sales on account includes a ____.

credit to sales revenue of $5.6 million and debit to accounts receivable of $5.6 million

A high receivables turnover ratio is a sign of a company ____.

effectiveness in granting and collecting credit

Using its agin of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to taking its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1000. After the adjustment, Bad Debt Expense on the income statement will be ____ the Allowance for Doubtful Accounts on the balance sheet.

greater than

The write-off of a specific credit customers account___.

has no effect on the income statement or the net receivable balance on the balance sheet

Sales on account ____.

increase assets and stockholders equity and increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement

Which of following are advantages of using national credit cards?

reduction of and debts expense and avoid lengthy cash collection periods

What information is provided by the receivables turnover ratio?

that a higher ratio means faster (better) turnover and the number of times receivables turn over during the period

The days to collect ratio provides what kind of information?

the average number of days from sale on account to collection and That a higher number of days means a longer (worse) time for collection

Notes receivable are used for____.

extending payment periods lending money to individuals or businesses and selling large dollar-value items

Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?

the receipt of the principal payment

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n)____.

write-off of a specific customer's account

____ Receivable arise from making sales to customers on account and are non-interest bearing. ______ Receivable are formal written contracts that are interest bearing.

Accounts and Notes

Match each account with the proper description. Notes Receivable Interest receivable Interest Revenue

the principle amount the amount of interest earned but not yet collected the amount of interest earned

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1000 of receivables will be uncollectible. Delectable's financial statements will show _____.

Bad Debt Expense of $950 and Allowance for Doubtful Accounts of $1000

Which of the following are disadvantages to extending credit to customers?

delayed receipts of cash increased bad debt costs and increased wage costs

The ____ write-off method is not allowed under GAAP.

direct

Math the following methods for estimating bad debts with their descriptions. Percentage of credit sales Aging of accounts receivable

estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses Estimates the allowance for doubtful accounts based on the age of each account receivable

Match the following methods for estimating bad debts with their descriptions Percentage of credit sales Aging of accounts receivable

estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses estimates the allowance for doubtful accounts based on the age of each account receivable

The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ____.

expense recognition (matching) principle

Why would a company debit Interest Receivable?

it generated interest on its notes receivable which will be collected in a later accounting period.

What is occurring if a company is debiting Cash and crediting Notes Receivable?

it is collecting the principle on amounts lent earlier

Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.

Accounts Receivable are debited in the period the revenue is recognized Bad Debt Expense is estimated and recorded with an adjusting entry and Specific customer balances are written off

The receivables turnover ratio is computed as _____.

net sales revenue divided by average net accounts receivable

The entry that includes a debit to allowance for doubtful accounts and a credit to accounts receivable is a(n) ____.

write off of a specific customers account

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

write off the uncollectible account and its corresponding allowance from the accounting records