ACCT Ch 8 Smart Book

The receivables turnover ratio gives information on how ______.

many times the company sells and collects amounts on account per year

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report ______. (Check all that apply.)

Bad Debt Expense of $7,250 on the income statement Allowance for Doubtful Accounts of $8,000 on the balance sheet Reason: The $750 unadjusted credit balance in the Allowance for Doubtful Accounts needs to be increased by $7,250 to get to the desired $8,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $7,250.

Why would a company debit Interest Receivable?

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

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, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

greater than Reason: The aging method specifies the desired ending balance in the Allowance account. The amount of the entry will depend on what the unadjusted balance in the Allowance is. The expense will be $91,000 because there is a $1,000 debit balance remaining in the Allowance account before adjustment. After adjustment, the Allowance will have a $90,000 credit balance (=$91,000 credit - $1,000 unadjusted debit balance) on the balance sheet and Bad Debt Expense will be $91,000 on the income statement.

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

It is collecting the principal on amounts lent earlier.

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 Reason: The aging method SPECIFIED the desired ending balance in the Allowance account which is $90,000. The $1,000 unadjusted debit balance in the Allowance for Doubtful Accounts needs to be increased by $91,000 to get to the DESIRED $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $91,000.

Which of the following are contra-asset accounts? (Check all that apply.)

Accumulated Depreciation Allowance for Doubtful Accounts

Sales on account will cause an increase in ______. (Select all that apply.)

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

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.

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

an asset called Notes Receivable

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

credit to Accounts Receivable debit to Bad Debt Expense

Which of the following are advantages of using national credit cards? (Check all that apply.)

reduction of bad debts expense avoid lengthy cash collection periods

Net sales revenue is $730,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the days to collect.

30 days Reason: Days to collect=365 days/accounts receivable turnover. Days to collect equals 30 days (=365/($730,000/(($62,000+$58,000)/2)),

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

The receipt of the principal payment (collecting principal amounts lent earlier)

The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a ______.

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

A disadvantage of extending credit to customers is that the cost may ______ the additional sales revenue received through credit transactions.

exceed

Which of the following are disadvantages to extending credit to customers? (Check all that apply.)

Increased bad debt costs Increased wage costs Delayed receipts of cash

A _______ stuffing scenario refers to when a company increases its credit sales by selling to less financially secure customers.

channel

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a ______. (Select all that apply.)

credit to Allowance for Doubtful Accounts of $1,100 debit to Bad Debt Expense of $1,100 Reason: To arrive at the desired $1,000 credit balance in the Allowance for Doubtful Accounts, Bad Debt Expense must be debited and the Allowance must be credited for $1,100. The amount expensed needs to be $1,100 in order to make up for the $100 unadjusted debit balance in the Allowance account. The $100 debit means the company did not expense enough in the prior period and thus must expense $1,100, an additional $100, to get to the desired balance of $1,000.

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

Sales on account ______. (Check all that apply.)

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

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. 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 greater than Reason: This is the Percentage of Credit Sales method. Thus, the entry includes a debt to Bad Debt Expense of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts. After adjustment, the Allowance will have a $900 credit balance (=$1,000 credit - $100 debit) on the balance sheet and Bad Debt Expense will be $1,000 on the income statement.

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.

1. Accounts receivable are recorded when revenue is recognized 2. Bad Debt Expense is estimated and recorded w adjusting entry 3. Specific customer balances are written off

Rank companies A-C based on how favorable their receivables turnover ratio is (from most favorable on the top to the least favorable). (Assume the companies have similar credit terms.)

1. Company A: 5.6 times 2. Company B: 3.4 times 3. Company C: 2.4 times

Which of the following statements is true?

Allowance for Doubtful Accounts is a permanent account.

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

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 Reason: The adjusting entry using the percentage of credit sales will be for $1,000 (=$100,000 credit sales x 1%). The debit is to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A).

Which company has the higher receivables turnover ratio? Company A: Average Net Accounts Receivable $2,000 Average Inventory $4,000 Net Sales $40,000 Company B: Average Net Accounts Receivable $5,000 Average Inventory $20,000 Net Sales $100,000

Both are the same Reason: Both have the same receivables turnover ratio of 20 times. Company A's equals $40,000/$2,000 and Company B's equals $100,000/$5,000.

Match the following methods for estimating bad debts with their descriptions.

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

What information is provided by the receivables turnover ratio?

That a higher ratio means faster (better) turnover The number of times the average receivables balance is collected during the period

In which situations does a company issue a note receivable?

The company lends money to employees or businesses. The company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest.

Match the entry that would be recorded for the 4 key events related to issuing an interest-bearing note.

The issuance of a note: debit Notes Receivable and credit Cash The adjusting entry to record interest owed: debit Interest Receivable and credit Interest Revenue The receipt of an interest payment: debit Cash and credit Interest Receivable The receipt of the principal payment: debit Cash and credit Notes Receivable

Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when ______.

a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable

A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest ______.

channel stuffing

The journal entry to record $5.6 million in sales on account includes a ______. (Select all that apply.)

debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million Reason: Sales on account are recorded with a debit to Accounts Receivable (+A) and a credit to Sales Revenue (+SE). The revenue recognition principle allows companies to record the revenue if they have delivered the goods/services even if the cash has not yet been collected.

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______. (Check all that apply.)

debit to Bad Debt Expense credit to Allowance for Doubtful Accounts

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

Allowance for Doubtful Accounts Reason: The direct write-off method (non-GAAP because it violates the expense recognition or matching principle) includes a credit to Accounts Receivable, not Allowance for Doubtful Accounts. The allowance method (GAAP) includes a credit to Allowance for Doubtful Accounts and is recorded in the period the sale is made, not later when it is discovered that the customer's account is uncollectible.

What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months? (Select all that apply.)

Credit Cash Debit Notes Receivable

Which of the following are advantages to extending credit to customers? (Check all that apply.)

Increased demand Increased sales

Which account is used to reduce assets for the amount of estimated bad debts?

The contra-asset account called Allowance for Doubtful Accounts Reason: Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______.

an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December Reason: A company will record interest revenue either when it receives an interest payment or reaches the end of an accounting period, whichever comes first.

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. The adjusting entry to record estimated bad debts includes a ______. (Select all that apply.)

credit to Allowance for Doubtful Accounts of $1,000 debit to Bad Debt Expense of $1,000 Reason: The entry includes a debit to Bad Debt Expense of $1,000 (=1% x $100,000) which is management's estimated expense on the income statement. The corresponding $1,000 credit is to Allowance for Doubtful Accounts. After adjustment, the Allowance for Doubtful Accounts will have a $1,100 credit balance (=$100 unadjusted credit balance plus $1,000 credit adjustment) on the balance sheet.

If a company writes off a SPECIFIC customer's account with a debit to Bad Debt Expense and credit to Accounts Receivable, it must be using the ______ method.

direct write-off Reason: The direct write-off, which is not GAAP because it violates the expense recognition (matching) principle, does not record an adjusting entry to estimate the amount of uncollectible accounts. Instead it waits until specific customers are identified as non-paying and writes them off debiting Bad Debt Expense, often in a different accounting period then when the related credit sales were made to these customers.

The 2 steps required using the allowance method, are to ______. (Select the 2 that apply.)

first make an end-of-period adjustment to record the estimated bad debts later write-off specific customer balances when they are known to be uncollectible 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. Later when the non-paying customer is specifically identified, it will write-off that customer's accounts receivable.

Bad Debt Expense ______. (Check all that apply.)

is a cost of extending credit to customers is an estimate

The fees charged by major credit card companies are included in ______.

selling expenses on the income statement

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ______. (Select all that apply.)

the amounts are estimates and no one knows which particular customers will not pay the company would lose track of which customers still owe money Reason: The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable in the subsidiary accounts because it is an estimate. Accounts Receivable cannot be reduced until it is know which specific customer's account should be credited. Later when a non-paying customer is identified, the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt 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 Reason: To arrive at the desired Allowance for Doubtful Accounts balance of $1,000 (=$10,000 x 10%), only $900 (=$1,000 minus the $100 credit unadjusted balance) needs to be credited to the Allowance account since there is already a $100 credit unadjusted balance in it. Thus the entry needed is a debit to Bad Debt Expense (+E,-SE) of $900 and a credit to Allowance for Doubtful Accounts (+xA,-A) of $900. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's uncollectible credit sales. The expense is a temporary account and reports only the expense on the current period's uncollectible credit sales.

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

Aging of accounts receivable method Reason: The aging of accounts receivable is more accurate in estimating the amount of uncollectibles because the estimate is based on management reviewing the age of each amount in Accounts Receivable and adjusting accordingly. The percentage of sales method simply applies a percentage to all credit sales (both collected and uncollected).

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings? (Check all that apply.)

Bad Debt Expense Depreciation Expense Sales Revenue Reason: Temporary accounts are revenues, expenses and dividends and are closed into Retained Earnings at the end of the accounting period. Permanent accounts are the balance sheet accounts that carry forward to the next accounting period becoming the beginning balances for the new accounting period. Bad Debt Expense is a temporary account and is closed into Retained Earnings at the end of the accounting period. Bad Debt Expense will thus differ from the Allowance for Doubtful Accounts, a contra-asset account, which is a permanent account. Its balance carries forward into the next accounting period and reports the amount of all credit sales still in accounts receivable expected to not be collected. Bad Debt Expense reports the amount of only the current period credit sales expected to not be collected.

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

Expense recognition (matching) principle

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).

Using the allowance method, Bad Debt Expense is recorded _____.

as an estimate in the period of the related credit sales 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.

The adjusting entry to record the allowance for doubtful accounts causes total ______. (Check all that apply.)

assets to decrease stockholders' equity to decrease Reason: Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

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

The days to collect ratio is computed as ______

365 divided by the Receivable Turnover Ratio

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 Reason: The method used is the Percentage of Sales method whereby the expense is calculated first and then the balance in the Allowance for Doubtful Accounts is determined. The adjusting entry includes a debit to Bad Debt Expense (+E,-SE) of $1,000 (=1% x $100,000) and credit to Allowance for Doubtful Accounts (+xA,-A). After adjustment, the Allowance will have a $1,100 credit balance (=$1,000 credit + 100 credit) on the balance sheet and Bad Debt Expense will equal $1,000 on the income statement. The Allowance (a permanent account) on the balance sheet is $100 more because of the $100 unadjusted credit balance carried forward from the prior period's credit sales. The expense is a temporary account and reports only the expense on the current period's credit sales.

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a debit balance when the amount of write offs recorded during the period is ______ the amount estimated to uncollectible in the prior accounting period.

greater than Reason: The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and decreased (debited) later when specific accounts receivables are written off. Thus, if the estimated amount is less than the amount written off, an unadjusted debit balance will result. Bad Debt Expense on the income statement will need to be more than the Allowance balance on the balance sheet to make up for the underestimate from the prior period.

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.

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 Reason: The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable because it is an estimate. Accounts Receivable cannot be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, it is written off and the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______. (Select all that apply.)

Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950 Reason: The aging of receivables means the $50 credit unadjusted allowance balance needs to be adjusted to the desired balance of a $1,000 credit. The entry requires a $950 debit to Bad Debt Expense and $950 credit to Allowance for Doubtful Accounts. The income statement will report Bad Debt Expense of $950 and the balance sheet will report the Allowance for Doubtful Accounts of $1,000. Only $950 needed to be expensed because there was a $50 credit remaining from the prior period.