accounting chapter 5

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? $75 $225 $450 $900

$225- (10,000 x .09 x 3/12)

if the estimated uncollectible is $7 million, what is the allowance for uncollectible accounts ending balance?

$7 million

At the end of its first year of operations, a company establishes an allowance for future uncollectible accounts for $5,600. At what amount would bad debt expense be reported in the current year's income statement?

5600

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 Accounts Receivable Cash Allowance for Uncollectible Accounts

Bad Debt Expense

aging method

Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts

How are trade discounts recognized?

By recording the sale at a discounted price

A company provides services to a customer in the current year and then determines in the following year that the customer's account needs to be classified as uncollectible. If the company uses the direct write-off method, which of the following would be recorded in the following year at the time of the write-off? Multiple Choice Debit Allowance for Uncollectible Accounts. Debit Accounts Receivable. Debit Bad Debt Expense. Credit Allowance for Uncollectible Accounts.

Debit Bad Debt Expense.

On October 1, Light Corp. provided services on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?

Debit Interest Receivable $2,000; credit Interest Income $2,000.

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25?

Debit Sales Discount for $10.

Under the direct write-off method, uncollectible accounts are recorded:

In the period the account is determined actually uncollectible.

Percentage-of-receivables method/balance sheet method

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

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? Both assets and liabilities decrease Both assets and revenues decrease Revenues decrease and liabilities increase No impact on the accounting equation

No impact on the accounting equation

direct write-off method

Recording bad debt expense at the time we know the account is uncollectible

Net revenues is calculated as total revenues minus which of the following items? Sales discounts Sales allowances Accounts receivable Allowance for uncollectible accounts Sales returns

Sales discounts Sales returns Sales allowances

Net revenues is calculated as total revenues minus which of the following items? Sales returns Accounts receivable Sales allowances Allowance for uncollectible accounts Sales discounts

Sales returns, Sales allowances, Sales discounts

Net accounts receivable

The difference between total accounts receivable and the allowance for uncollectible accounts

under the direct write-off method, the balance of the accounts receivable account is reduced:

When an account is proven uncollectible.

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

account receivable

contra revenue account

account with a balance that is opposite to that of its related revenue account

A company will debit ___________ when recording a credit sale.

accounts receivable

The legal right to receive cash is valuable and represents an asset of the company which is called:

accounts receivable

accounts with a normal credit balance: Accounts Receivable Accounts Receivable Allowance for Uncollectible Accounts Allowance for Uncollectible Accounts Correct Bad Debt Expense Bad Debt Expense Cash Cash Sales Revenue

allowance for uncollectible accounts (contra account) and sales revenue

A company that expects that some of its customers will not pay the agreed upon sales price must utili

allowance method

what method for uncollectible accounts is required for financial reporting by generally accepted accounting principles?

allowance method

where is the allowance for uncollectible accounts reported?

asset section of the balance sheet (represents a reduction in the balance of accounts receivable)

The direct write-off method is not normally an acceptable method under GAAP because it fails to report _____.

assets and expenses correctly

Writing off an account receivable using the direct write-off method includes a debit to: Accounts Receivable Allowance for Uncollectible Accounts Bad Debt Expense Cash

bad debt expense

With the direct write-off method, the journal entry to write-off an uncollectible account includes a debit to _____ and a credit to _____.

bad debt expense; accounts receivable

what is the upside to allowing customers to use credit?

boosts sales by allowing customers to purchase on account and pay cash later,

Sales Return is what type of account

contra account

allowance for uncollectible accounts

contra asset account representing the amount of accounts receivable that we do not expect to collect (reduced accounts receivable indirectly)

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

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: Multiple Choice debit to Bad Debt Expense for $5 million debit to Bad Debt Expense for $14 million credit to Allowance for Uncollectible Accounts for $1 million credit to Allowance for Uncollectible Accounts for $5 million

credit to Allowance for Uncollectible Accounts for $1 million

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 $1000- not paid within 10 days so just a normal entry

sales return

customer returns a product

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: Multiple Choice debit to Accounts Receivable for $10,000 debit to Notes Receivable for $10,000 credit to Service Revenue for $10,225 debit to Accounts Receivable for $10,225

debit Notes Receivable for $10,000

Writing off an account using the direct write-off method requires what entry?

debit to Bad Debt Expense and a credit to Accounts Receivable.

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 $12,000 debit to Bad Debt Expense for $9,000 credit to Allowance for Uncollectible Accounts for $15,000 credit to Allowance for Uncollectible Accounts for $12,000

debit to bad debt expense for $9000 (12000-3000)

The entry to record the estimate for uncollectible accounts includes:

debit to bad expense

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- paid within 10 days

establishing an allowance for uncollectible accounts journal entry

debit- bad debt expense of amount you think will not be paid credit- allowance for uncollectible accounts

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 (accounts receivable) and decrease net income... due to an increase in expenses (bad debt expenses)

for tax reporting what method under the GAAP is required?

direct write-off method

if you decrease a cash based notes payable then it is what kind of activity?

financing

Under the allowance method for uncollectible accounts, the balance of Allowance for Uncollectible Accounts increases when:

future bad debts are estimated

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

had no effect on total assets and net income

using the allowance method, we account for event that....

have not yet occurred but are likely to

what does n/30 mean?

if the customer does NOT take the discount (2/10), full payment net of any returns or allowances is due within 30 days

when does the seller record revenue when a credit sale is made?

immediately once goods/services are provided to the customer and future collection from the customer is probable

with the direct write-off method when is the bad debt expense recorded?

in year 2 when the account proves uncollectible- not year 1 like the allowance method

the estimated percent uncollectible ______ with age

increases

what does 2/10 mean?

indicates the customer will receive a 2% discount if the amount owed is paid within 10 days

the older the account.... the _____ likely it is to be collected

less

allowance method

method of reporting accounts receivable for the net amount EXPECTED to be collected... company must estimate the amount of current accounts receivable that will prove uncollectible in the future and report this estimate as a contra asset to its accounts receivable

collecting cash on an account previously written off has what affect on assets and net income?

no affect on either

what effect does collecting cash on accounts previously written off have on total assets and net income?

no effect

what effect does a write-off of the accounts receivable have on total amounts reported in the balance sheet/income statement?

no effect (increases allowance for uncollectible accounts- asset and decreases accounts receivable-asset)

is the write-off method generally allowed for financial accounting reporting under GAAP?

no- only tax recording

what is the downside to allowing customers to use credit?

not all customers will pay fully on their accounts- uncollectible accounts or bad debts

The direct write-off method is normally not permitted for U.S. GAAP reporting because if related credit sales occurred in the prior year, it: (Select all that apply.) overstates net income in the current year overstates assets in the current year overstates assets in the prior year overstates net income in the prior year

overstates assets in the prior year overstates net income in the prior year

Estimated uncollectible accounts do what to assets

reduce assets

trade discounts

reduction in the listed price of a product or service- provides incentives to larger customers/groups to purchase from the company EX: changing the price for the month of march (limited time)

sales discount

represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time

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

benefit of extending credit

seller makes it more convenient for buyer to purchase goods/services, and in the long run will benefit the seller by increasing profitability of the company

sales allowance

seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service

invoice

source document that identifies the date of sale, customer and specific items sold, dollar amount of sale and payment terms

a credit balance in the allowance account BEFORE adjustment indicates what?

the balance at the beginning of the year was too high

a debit balance in the allowance account BEFORE adjustment indicates what?

the balance at the beginning of the year was too low

a credit balance before adjustment indicates what?

the balance of the allowance account at the beginning of the year is too high

a debit balance before adjustment indicates what?

the balance of the allowance account at the beginning of the year was too low

bad debt expense

the cost of estimated future bad debts that is reported as an expense in the current year's income statement

cost of extending credit

the delay in collecting cash from customers and the possibility that some customers may not end up paying at all, therefore reducing the operating efficiency of the company and leading to lower profitability

The entry to write-off uncollectible accounts results in a reduction in total assets when using: Multiple Choice the allowance method. the direct write-off method. either the allowance or direct write-off methods.

the direct write-off method

what is the beginning balance of allowance for uncollectible accounts for the following year?

the estimated future bad debts

the allowance method and direct write-off method show what type of difference?

timing differences allowance- reports at the time of estimate- before it even proves uncollectible direct- reports in the next period, during the period the account proves uncollectible

Major difference between direct write-off method and allowance method

timing- direct write-off method is less timely in recognizing uncollectible accounts

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 high. too low. fraudulent.

too low

credit sales (sales/services on account)

transfer goods/services to a customer today while bearing the risk of collecting payments from customer in the future

true or false: Writing off actual bad debts and reestablishing those previous write-offs when it appears that customers will pay has no effect on net accounts receivable.

true

true or false: A debit balance in the Allowance for Uncollectible Accounts before year-end adjustment indicates that the company wrote off more bad debts in the current year than it had estimated.

true... A debit balance in the allowance account before adjustment indicates that its balance at the beginning of the year was too low.

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

The percentage-of-receivables method is sometimes referred to as the balance sheet method, because...

we base the estimate of bad debts on an amount found in the balance sheet (accounts receivable)