ACCT 201_ Smart book 5

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

The percentage-of-credit-sales method is also commonly referred to as the

income statement method

The direct write-off method is required for

income tax purposes.

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible.

Gammy Corporation provides services with a normal price of $800,000 and a trade discount of $100,000. Terms are 2/10, n/30 and the customers pay within 10 days. The net service revenue is

$800,000 - 100,000 trade discount = $700,000 gross sales less 2% discount (.02x700,000) = $686,000. 686,000

Payment for credit sales are typically due in

30 to 60 Days

Fog Corporation sells $5,000 goods on account. Salaries expense was $3,000. Sales returns were $100, and sales discounts were $300. Net sales were

4,600 5000-100-300

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

What is the transaction that required the following entry?

Collect on interest-bearing note receivable.

Bell provides $500 of services to customers on account with terms 3/10, n/30. The Service Revenue account is credited for $500. If the customer pays within 10 days, Bell will record which of the following?

Debit Sales Discount $15

Which of the following are classified as receivables

Loans by a company to other entities Interest due from loans to customers

Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet?

No effect on total assets.

Compute the receivables turnover ratio using the following information: Net credit sales is $200,000 for year 2. Total assets at the end of years 1 and 2 were $800,000 and $1,200,000, respectively. Accounts receivable at the end of years 1 and 2 were $40,000 and $60,000, respectively.

Reason: Net credit sales/average accounts receivable = $200,000/((40,000+60,000)/2) = 4

Which of the following may be disadvantages of extending credit to customers and relaxing collection policies?

Requires higher investment in receivables Increased bad debt

Trade receivable is another term for

accounts receivable

The term net accounts receivable refers to

accounts receivable less the allowance for uncollectible accounts.

The average accounts receivable balance is calculated by:

adding last year's and this year's ending balances of accounts receivable and dividing the sum by 2

The estimated expense for accounts that may not be collected is referred to as

bad debt expense

Sales Returns and Sales Allowances are ___________accounts and require a debit entry to increase the account.

contra - revenue

The account "Allowance for Uncollectible Accounts" normally has a

credit balance

The income statement approach for estimating bad debts focuses on

current year's credit sales.

The receivables turnover ratio and the average collection period provide information about a company's

effectiveness in managing receivables

York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows: (Select all that apply.)

equity decreases assets decrease

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

future;current

Which of the following may be the result of extending payment periods?

greater required investment in receivables increased gross sales

(Face value x annual interest rate x fraction of the annual period) is the formula for

interest on a note.

An aging schedule classifies accounts receivable based on

length of time outstanding.

The difference between total accounts receivable and the allowance for uncollectible accounts is referred to as:

net accounts recievable

Total revenues less discounts, returns, and allowances are referred to as

net revenue

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will _____ net income.

not affect

Receivables not expected to be collected should

not be counted in assets of the company.

The income statement method is another commonly used term to refer to the

percentage-of-credit sales method.

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

receivable turnover ratio average collection period

The _____ ratio shows the number of times during a year that the average receivable balance is collected.

receivables turnover

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to

sales discount

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

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

sales return

Glasser Corp. provided $20,000 of services on account. The account that should be credited is

service revenue.

Accounts receivable are typically classified as current assets because

they will be converted to cash within 1 year.

An account receivable is normally classified as

an asset.

What is the formula for the receivables turnover ratio?

dividing your net credit sales by your average accounts receivable

sales allowance

A customer receives a partial refund of the sales price after the customer discovers a flaw in the merchandise. The customer keeps the merchandise.

Which of the following items are classified as receivables?

Amounts loaned and expected to be repaid Tax refund claims Amounts owed by customers

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

Claire provides $100 of services to customers on account with terms 2/10, n/30. The Service Revenue account is credited for $100. If the customer pays within 10 days, Claire will record which of the following?

Credit Accounts Receivable $100 Debit Cash $98 Debit Sales Discount $2

When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?

Debit Accounts Receivable. Credit Allowance for Uncollectible Accounts.

What are the financial statement effects of recording bad debt expense using the allowance method?

Decrease assets Increase expenses

Mark records a journal entry with a debit to Bad debt Expense and a credit to Accounts Receivable. Mark is utilizing the:

Direct write-off method

The allowance method is required by

GAAP

A company makes a sale on terms 2/10, n/30. What does this mean? (Select all that apply.)

If payment is not made in 10 days, the net amount is due in 30 days. The customer may take a 2% discount off the price if paid within 10 days.

When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?

Make an adjusting entry at the end of the current period to accrue the interest earned.

Net revenues is calculated as total revenues minus which of the following items

Sales allowances Sales returns Sales discounts

Another term sometimes used for accounts receivable is

Trade recievable

A trade discount is

a percentage reduction from list price.

The percentage-of-receivables method of estimating bad debt applies ____ to _____.

a single percentage; accounts receivable

Flounder Corp. provided $12,000 of services on account. The entry to record this transaction would include a debit to

accounts receivable.

The allowance for uncollectible accounts is a contra account to

accounts receivable.

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

accounts recievable

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

accounts recivable

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the______method of accounts recievable

aging

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated. Reason: The direct write off method records a bad debt when the debt becomes bad.

For a typical credit sale, the seller records revenue

at the point of delivery

A trade discount is recognized

by reducing the revenue amount recorded.

The sales discount account is classified as a(n)

contra revenue account

The Sales Returns and Sales Allowances accounts are classified as

contra revenue accounts.

If the allowance for uncollectible accounts is 25% of year-end accounts receivable, this might indicate

credit policies are too lenient.

The income statement approach for estimating bad debts uses a percentage of

credit sales

ABC Corp. received a 3-month, 8%, $1,500 note receivable on November 1. The adjustment for interest earned by December 31 will include a:

credit to Interest Revenue of $20 Reason: $1,500 x 0.08 x (2/12) = $20; the time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate).

Shannon Corp. uses the aging method to account for bad debt expense. Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

debit Allowance for Uncollectible Accounts.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

debit to Notes Receivable, $40,000.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip initially recorded this as an account receivable but it later became apparent Daffodil could not pay quickly so Tulip required Daffodil to sign $40,000, 10%, 3-month interest-bearing note. The entry required on Tulip's books when Daffodil signs the note would include a

debit to Notes Receivable, $40,000.

Kilroy Corporation provides services to a customer for $1,000. The customer complained that there was a slight defect in the service. Kilroy granted the customer a $50 credit. Kilroy will record this adjustment to the sales price with a

debit to Sales Allowances $50

Recording bad debt expense: (Select all that apply.)

decreases assets decreases net income increases expenses When recording bad debt expense, assets are reduced through the allowance contra account

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

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

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

The financial statement effects of recording an allowance for estimated sales returns are that: (Select all that apply.)

equity decreases net income decreases assets decrease

At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too high.

At the beginning of the year, Blocker Company's allowance account has a debit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too low.

Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.

estimated; at the end of the year

The formula for calculating interest on a note is

face value x annual rate x fraction of the annual period.

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

false

The write-off of a specific accounts receivable ______ total assets reported on the balance sheet.

has no effect on

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

Bad debt expense is reported on the and is classified as an operating expense.

income statement

A high ratio of allowance for uncollectible accounts to total accounts receivable can indicate: (Select all that apply.)

the company extends too much credit the company's customers are high-risk

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

The receivables turnover ratio indicates

the number of times during a year that the average accounts receivables were collected.

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

The allowance method estimates

uncollectible accounts.

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

18,000 20,000 - 2,000

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000.

The percentage-of-receivables approach to measuring bad debt expense is referred to as _____ method.

a balance sheet

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable

The normal balance of notes receivable is:

a debit

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to

allowance for uncollectible accounts.

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

allowance method

"Net credit sales" refers to credit sales net of:

allowances returns discounts

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

be more accurate.

The two conditions that must exist for a sale and the related receivable to be recognized are

collection from the customer is probable. the company has provided goods or services to the customer.

Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.

contra-asset

an ______balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high.

credit

When a business provides services to a customer, and the customer promises to pay later, this is referred to as

credit sales

The income statement approach for estimating bad debts uses a percentage of

credit sales.

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

credit sales. sales on account.

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a

credit to Allowance for Uncollectible Accounts.

Adrian Corp. sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The entry Adrian makes on May 15 will include the following: (Select all that apply.)

credit to Cash debit to Sales Returns

The journal entry to record bad debt expense includes: (Select all that apply.)

credit to allowance for uncollectible accounts debit to bad debt expense

Abby Fashions sells a suit to a customer for $600 on account. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby Fashions grants the customer a $60 credit. Abby Fashions will record:

debit to Sales Allowances $60 credit to accounts receivable $60

What comparative advantages do notes receivables possess compared to other receivables? (Select all that apply.)

higher likelihood of collectibility interest-bearing

Accounts receivable are normally classified

in the balance sheet as assets.

The amount of net credit sales is reported on the .

income statement

On November 1, year 1, ABC, Inc., received a 3-month, 8%, $1,500 note receivable with interest and principal to be collected on February 1 of year 2. What is the amount of interest revenue that should be recorded for year 1?

20 Reason: The 8% is an annual rate and since only 2/12 of a year has been earned, interest revenue is $20 (=$1,500*0.08*(2/12)). Nov and Dec is 2/12 of a year.

The list price in Boyton's catalog indicates that Product A sells for $3,000, with a trade discount of 5%. Boyton sells the goods to a customer who qualifies for the trade discount. At what amount should Boyton record the sale and related account receivable?

2850 3000 less 5%

The formula for average collection period is

365 divided by the receivables turnover ratio.

James Corporation sells $1,000 goods on account. Sales returns were $40, and sales allowances were $50. Sales discounts for the period were $30. Net sales are

880 Sales minus sales discounts, returns, and allowances equals net sales. $1,000 - ($40 + $50 + $30) = $880.

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?

93,000 100,000-7000

Relay Corporation provides services with a normal price of $105,000 and a trade discount of $5,000. Terms are 1/10, n/30 and the customers pay within 10 days. The net service revenue is

99,000 $105,000 - 5,000 trade discount = $100,000 gross sales less 1% discount (.01x100,000) = $99,000.

sales return

A customer returns merchandise purchased during the month and receives a refund of the full sales price.

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

Credit to Accounts Receivable Debit to Allowance for Uncollectible Accounts

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.

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable.

Kim Corporation sells goods to a customer on account for $1,000, terms 2/10, n/30. When the customer pays on the 20th day, Kim will record which of the following?

Debit cash $1,000

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

On Sept 1, year 1, Parnell Inc. received a 6-month, 6%, $2,000 note receivable with interest and principal to be collected on March 1 of year 2. What is the amount of interest revenue that should be recorded for year 1?

Reason: The 6% is an annual rate and since only 4/12 of the year has been earned, interest revenue is $40 (=$2,000 x .06 x (4/12)). Sept, Oct, Nov, Dec is 4/12 of a year. 40$

The formula to compute the receivables turnover ratio is net credit sales divided by

average accounts receivable.