Acct ch 8

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 less than

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

It is collecting the principal on amounts lent earlier.

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

Increased demand Increased sales

Net sales revenue is $720,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio.

12 times

The days to collect ratio is computed as ______

365 divided by the Receivable Turnover Ratio

Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer?

Additional sales revenue

Which method of allowing for estimated uncollectible accounts is generally more accurate?

Aging of accounts receivable method

The adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to ____________________.

Allowance for Doubtful Accounts

The allowance method requires that ______.

Allowance for Doubtful Accounts be netted against Accounts Receivable Bad Debt Expense be recorded in the same period as the related credit sales

Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, the ______.

Allowance for Doubtful Accounts will have a $90,000 credit balance

Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method?

An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale.

True or false: The adjusting entry to record Bad Debt Expense includes a credit to Accounts Receivable.

False (Reason: The Allowance for Doubtful Accounts is credited, not Accounts Receivable. Accounts Receivable will be written off later when the specific customer is known with a debit to Allowance for Doubtful Accounts (-xA,+A) and a credit to the customer's Accounts Receivable (-A).)

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The Accounts Receivable balance is $8,000. Management estimates that 1% of its credit sales will be uncollectible. This adjusting entry includes a debit to ______.

Bad Debt Expense and credit to Allowance for Doubtful Accounts for $1,000

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______.

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

Failing to record bad debt expense in the same period as the related revenue violates which principle?

Expense recognition (matching) principle

Why is Bad Debt Expense an estimate?

GAAP require the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

Percentage of credit sales method (Reason: Aging of accounts receivable method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance.)

The days to collect ratio provides what kind of information?

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

Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?

The Allowance for Doubtful Accounts had an unadjusted credit balance. (Reason: Prior to making the adjusting entry, the Allowance balance had an unadjusted credit balance, i.e., amounts allowed for in the past have not been written off. Thus, the adjusting entry, debit Bad Debt Expense (+E,-SE) and credit Allowance (+xA,-A) is less than the ending balance in the Allowance account.)

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

The establishment of a note

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

The receipt of an interest payment for interest previously recorded

What effect does the collection of a note receivable, excluding interest, have on the accounting equation?

Total assets remain the same.

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.

Removing an uncollectible account and its corresponding allowance from the accounting records is called ______.

a write-off

A sale on account is recorded with a debit to __________ _____________ and a credit to ___________ _______________.

accounts receivable sales revenue

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 advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to ______.

bad debt expense

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______.

bad debt expense to decrease sales to decrease

Which company has the higher receivables turnover ratio?

both are the same

Allowance for Doubtful Accounts is a(n) ___________-asset account and has a normal ___________ balance.

contra credit

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 ______.

credit to Allowance for Doubtful Accounts of $1,000 debit to Bad Debt Expense of $1,000

On March 1, Scents, Inc. lent $1,000 to an employee at a rate of 6% for 3 months. Scents' entry to record the loan of $1,000 to its employee includes a ______.

credit to Cash of $1,000 debit to Notes Receivable of $1,000

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.

credit; decrease

An employee paid a company back for amounts the company lent 3 months earlier. The company would record the collection from the employee by ______.

debiting Cash and crediting Notes Receivable

A high receivables turnover ratio is a sign of a company's ______.

effectiveness in granting and collecting credit

A company's Bad Debt Expense reports the ______.

estimated amount of this period's credit sales that customers will fail to pay (Reason: In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.)

If the Allowance for Doubtful Accounts has a credit balance prior to recording the adjusting entry for the current period's uncollectible accounts, then the ______.

estimated amount of uncollectibles was greater than the amounts actually written off (Reason: The Allowance account is credited for the estimated amount of bad debts at the end of the accounting period and later is debited for the write-offs of the actual bad receivables. Thus, there will be a credit balance in the Allowance when the estimate is greater than the actual amounts written off.)

Notes receivable are used for ______.

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

Notes Receivable differ from Accounts Receivable in that Notes Receivable ______.

generally charge the borrowers interest from the day they are signed to the day they are collected

Sales on account ______.

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

The 2 steps required using the allowance method, are to ______.

later write-off specific customer balances when they are known to be uncollectible first make an end-of-period adjustment to record the estimated bad debts

An adjusting entry to accrue for interest earned is often needed when a company has ______.

notes receivable

To be in accordance with GAAP, companies are required to estimate the amount of uncollectible receivables and make an adjusting entry. The effect of the adjusting entry is to ______.

reduce Net Income by debiting Bad Debt Expense and reduce net accounts receivable by crediting Allowance for Doubtful Accounts

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______. (Check all that apply.)

sales to decrease bad debt expense to decrease

An objective of the expense recognition (matching) principle is to have bad debt expense debited in ______.

the same period the related credit sales are recorded

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