Accounting CH 7

Leo Co. uses the allowance method to account for bad debts. At the end of the year, Leo Co.'s accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (credit); and sales of $500,000. Based on history, Leo estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of: $10,000 $600 $500 $400 $9,900 $10,100

$400 Reason: $25,000 x 2% = $500 desired ending balance in the allowance account. Subtract the beginning credit balance to determine the amount of the adjusting entry. $500 - $100 = $400.

Yates Co. uses the allowance method to account for bad debts. At the end of the period, Yate's unadjusted trial balance shows an accounts receivable balance of $10,000; allowance for doubtful accounts balance of $400 (credit); and sales of $500,000. Based on history, Yates estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of: $5,400 $5,000 $4,600 $1,400 $600

$5,000 Reason: Since this is based on a percentage of sales, you should simply multiply $500,000 x .01 = $5,000.

Ana Co. uses the allowance method to account for bad debts. At the end of the period, Ana's unadjusted trial balance shows an accounts receivable balance of $40,000; allowance for doubtful accounts balance of $300 (credit); and sales of $500,000. Based on history, Ana estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of: $10,300 $9,700 $800 $1,100 $10,000 $500

$500 Reason: $40,000 x 2%=800-300=$500

Flash Co. uses the allowance method to account for bad debts. At the end of the year, Flash Co.'s unadjusted trial balance shows an accounts receivable balance of $45,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,500,000. Based on history, Flash estimates that bad debts will be 0.5% of sales. The entry to record estimated bad debts will include an debit to Bad Debts Expense in the amount of: $750,000 $7,500 $7,100 $7,900 $795,000

$7500 Reason: When allowance method is based on sales, do not take into account previous balance in the allowance account. $1,500,000x.005=$7,500.

Review the statements below and choose the one that correctly describes a control account. A control account appears in a subsidiary ledger and is supported by a general ledger account. A control account is a separate account that is a detailed record of a general ledger account. A control account is updated at the end of an accounting period to reflect the net change in all equity accounts. A control account appears in the general ledger and is supported by a subsidiary ledger.

A control account appears in the general ledger and is supported by a subsidiary ledger.

Ace Company sells merchandise to a customer in the amount of $200 on credit, terms n/30. The entry to record this sale would include a debit to the Blank______ account: Accounts Payable Cash Sales Accounts Receivable

Accounts Receivable

In July, Lane Co. sells merchandise to Avery Co. on account. In August, Avery pays the balance in full. The entry that Lane will make to record the receipt of cash will include a credit to the Blank______ account. Accounts Payable Sales Unearned Sales Accounts Receivable Cash

Accounts Receivable

On March 14, Zest Co. accepted a 120-day, 6% note in the amount of $5,000 from AZC Co., a customer. On the due date of the note, AZC dishonors the note and fails to pay. The journal entry that Zest would make to record the failure to pay this note on the due date would include a debit to: Cash for $5,100 Accounts Receivable - AZC for $5,000 Cash for $5,000 Notes Receivable for $5,100 Accounts Receivable - AZC for $5,100 Notes Receivable for $5,000

Accounts Receivable - AZC for $5,100 Reason: Interest = $5,000 x .06 x (120/360) = $100.

On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to: Accounts Receivable for $3,025 Accounts Receivable for $3,150 Cash for $3,025 Cash for $3,150 Accounts Receivable for $3,000 Cash for $3,000

Accounts Receivable for $3,025 Interest = $3,000x.05x(60/360)=$25. Accounts receivable is debited for $3,025, for the note plus the interest.

To record a sale on account, the company should debit: Sales. Accounts Receivable. Unearned Sales. Accounts Payable.

Accounts Receivable.

Which of the following statements is (are) true about accounts receivables? (Check all that apply.) Accounts receivable are a liability. Accounts receivable are increased when credit sales are made. Accounts receivable reflects the amount owed by customers. Accounts receivable are increased when payments are received from credit customers.

Accounts receivable are increased when credit sales are made. Accounts receivable reflects the amount owed by customers.

A company has $150,000 of credit sales during the year and estimates that $1,000 of its accounts receivable will be uncollectible. The adjusting entry will include a credit to: Allowance for Doubtful Accounts Bad Debts Expense No adjusting entry is needed Allowance for Bad Debts

Allowance for Doubtful Accounts

Principal

Amount that the signer agrees to pay back, not including interest

A 60-day note is signed on February 15 (and it's not leap year). The due date of the note is: April 15 April 14 April 16

April 16 Reason: February 28th - February 15th = 13 days + 31 days for March = 44 days; 60 total days - 44 days = 16; therefore, April 16.

To record a customer's check in full payment for a sale that was made the prior month, the company should debit the Blank______ account. Accounts Receivable Cash Accounts Payable Unearned Sales Sales

Cash

On January 1, JC Co. accepted a 60-day, 6%, note in the amount of $10,000 from a customer. On March 2, the due date of the note, the customer honors the note and pays in full. The journal entry that JC would make to record the receipt of payment of this note would include a debit to: Notes Receivable in the amount of $10,100 Notes Receivable in the amount of $10,000 Cash in the amount of $10,100 Cash in the amount of $10,000

Cash in the amount of $10,100 Reason: Notes receivable will be credited for $10,000. Reason: Cash will be debited for $10,100. $10,000 x .06 x (60/360)=$100. $10,000+$100=$10,100.

Interest

Charge from using money loaned from one entity to another

Maturity date

Day that the principal and interest must be paid

A company estimates that $1,000 of its accounts receivable is uncollectible at the end of the period and will make the following adjusting entry: Debit to Bad Debts Expense for $1,000 Credit to Allowance for Doubtful Accounts No journal entry is made under the allowance method until specific accounts are determined to be uncollectible Debit to Allowance for Doubtful Accounts

Debit to Bad Debts Expense for $1,000 Credit to Allowance for Doubtful Accounts

On March 14, Teal Co. accepted a 120-day, 6% note in the amount of $10,000 from AZC Co., a customer. On the due date of the note, AZC honors the note and pays in full. The journal entry that Teal would make to record payment of this note would include a credit to: Interest Receivable for $200. Note Receivable for $10,200. Interest Revenue for $200. Cash for $10,000.

Interest Revenue for $200. Cash is debited for $10,200 (principal plus interest). Interest Revenue will be credited for $200.

A 90-day note is signed on October 21. The due date of the note is: January 19 January 21 January 18 January 20

January 19 Reason: 90 days = 31-21=10 days in October + 30 days in November + 31 days in December + 19 days in January. Always start with the number of days in the first month and subtract the date of the note. (October: 31-21 = 10).

The advantages of using the allowance method to account for bad debts include which of the following? Requires no accounting estimates Matches expenses in the same period with the related sales Reports accounts receivable balance at the estimated amount to be collected

Matches expenses in the same period with the related sales Reports accounts receivable balance at the estimated amount to be collected

DonCo, Inc. sold merchandise on January 14, and accepted a 90-day, 5% promissory note in the amount of $5,000. On January 14, the entry to record this transaction would include a debit to: Sales in the amount of $5,000 Accounts Receivable in the amount of $5,000 Notes Receivable in the amount of $5,000 Cash in the amount of $5,000

Notes Receivable in the amount of $5,000Notes Receivable in the amount of $5,000

Maker

One who signed the note and promised to pay at maturity

Payee

The person to whom the note is payable

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts. True/False

True

The two methods companies can use to convert receivables to cash before they are due includes selling them and pledging them. T/F

True

Promissory note

Written promise to pay a specified amount of money

The two most common receivables are _______ receivables and ___________receivables.

account; note

The (aging/percent) __________ of accounts receivable method uses several percentages, based on how long an account is past due, to estimate the allowance.

aging

The __ method of estimating bad debts uses both past and current receivables information to estimate the allowance amount. Specifically, each receivable is classified by how long it is past its due date. percentage of sales percentage of receivables aging of receivables

aging of receivables

The (allowance/direct write-off) ________ method of accounting for bad debts records estimated bad debts expense in the period when the related sales are recorded.

allowance

On January 1, Franz Co. accepted a 30-day, 6% note in the amount of $5,000 from Bria Co., a customer. On January 31, the due date of the note, Bria honors the note and pays in full. The journal entry that Franz would make to record payment of this note would include a: debit to Interest Revenue for $25. credit to Interest Revenue for $25. credit to Note Receivable for $5,025. debit to Cash for $5,025. credit to Note Receivable for $5,000.

credit to Interest Revenue for $25. debit to Cash for $5,025. credit to Note Receivable for $5,000. Reason: Credit to Notes Receivable for $5,000. Credit to Interest Revenue for $25. $5,000 x .06 x 30/360=$25.

On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 overdue account. Eli's journal entry to record this transaction on November 1, would include a: debit to Notes Receivable for $6,000. credit to Notes Receivable for $6,060. debit to Accounts Receivable for $6,060. credit to Accounts Receivable for $6,000.

debit to Notes Receivable for $6,000. credit to Accounts Receivable for $6,000.

The __ method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense. percentage of sales allowance direct write-off percentage of receivables

direct write-off

Accounts receivable are _______(increased/decreased) by credit sales and are ________ (increased/decreased) by customer payments.

increased Field 2: decreased

The (maker/payee) _________ of the note is the one that signed the note and promised to pay at maturity. The (maker/payee) ___________of the note is the person to whom the note is payable.

maker; payee

A ______ is an amount due from another party. receivable payable return sale

receivable

Explain what a control account is by completing the following sentence. A control account appears in the general ledger and is supported by information in a separate __________ (general/subsidiary) ledger.

subsidiary

Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include: to satisfy customer's needs. the company does not want to deal with collecting receivables. the company needs cash. to quickly increase profit.

the company does not want to deal with collecting receivables. the company needs cash.