ACG 2021 Ch. 8

At the beginning of the year, a company had accounts receivable of $2,100,000 and an allowance for doubtful accounts with a credit balance of $180,000. During the current year, sales on account were $580,000 and collections on account were $344,000. Also during the current year, the company wrote off $32,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $216,000 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?

$168,000 increase Ending accounts receivable = $2,100,000 + 580,000 - 344,000 - 32,000 = 2,304,000 Ending allowance for doubtful accounts = $216,000 (given) Ending cash realizable value = $2,304,000 - 216,000 = $2,088,000 Beginning cash realizable value = $2,100,000 - 180,000 = $1,920,000 Increase (decrease) in cash realizable value = $2,088,000 - 1,920,000 = $168,000

During the current year, Wheeler Company had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, Wheeler Company also collected $5,800 from a customer whose account Wheeler Company had been written off as uncollectible in the prior year. As a result of these transactions, the current year change in the accounts receivable balance is a

$192,000 increase. Accounts receivable increase by sales on account, decrease when cash is collected on customers' accounts, increased and decreased by equal amounts when previously written off accounts are recovered = $528,000 - 336,000 + 5,800 - 5,800 = $192,000 Cash sales do not affect accounts receivable.

On January 15, Walton Company sold merchandise on account for $3,000 with terms 3/10, n/30. On January 20, the customer returns merchandise with an invoice price of $600. On January 25, the customer pays the balance due. What is the amount of cash received by Walton Company?

$2,328 The customer bought $3,000 of merchandise but returned $600 for a net purchase of $2,400. The customer paid within the 10-day discount period. With terms 3/10, n/30, the discount is 3% of the net purchase. The cash received is $2,328 computed as follows: [($3,000 x $600)] x 97% = $2,328

At the start of the year, Willet Company's Allowance for Doubtful Accounts had a credit balance of $36,000. During the year, it had credit sales of $1,500,000. It also wrote-off $45,000 of uncollectible accounts receivable during the year. Past experience indicates that the allowance should be 5% of the balance in receivables. If the accounts receivable balance at December 31 was $400,000, what is the required adjustment to the Allowance for Doubtful Accounts that is needed at year-end?

$29,000 Bad debt expense = Ending accounts receivable times percent uncollectible minus the subtotal balance in the allowance Bad debt expense = ($400,000 x 5%) - (36,000 - 45,000) = $29,000 Note: the allowance had a $36,000 credit balance that was reduced by $45,000 producing a$ 9,000 debit balance, and the allowance needs to have a $20,000 credit balance.

A company has the following receivables: Advances to employees $ 1,580 Accounts receivable 2,550 Income taxes refundable 1,120 Interest receivable 950 Note receivable issued by its largest customer 2,220 A loan to the company president 8,000 Based on this information, what is the company's trade receivables?

$4,770 Trade receivables result from sales transactions with customers. Accounts receivable are trade receivables. Notes receivable may or may not arise from sales transactions with customers. Notes receivable arising from sales transactions are trade receivables, and notes receivable not arising from sales transactions with customers are not trade receivables. Trade receivables = $2,550 + $2,220 = $4,770

The maturity value of a $40,000, 9%, 70-day note receivable dated July 3 is

$40,700 Maturity value = Principal plus interest Maturity value = Principal + Principal x interest rate x time Notes stated in terms of days measure time as the number of days divided by 360 $40,000 + ($40,000 x .09 x 70/360) = $40,700

Using the allowance method, the uncollectible accounts for the year are estimated to be $40,000. The Allowance for Doubtful Accounts has a $9,000 debit balance before recording the year-end adjusting entries. What is the bad debt expense for the period?

$49,000 After the year-end adjusting entry, the allowance for doubtful accounts will equal $40,000 with a credit balance because the allowance for doubtful accounts is a contra assets (and contra assets normally have credit balances). Prior to the year-end adjusting entry, it has a $9,000 debit balance. So, the year-end adjusting entry will increase it by $49,000; the year-end adjusting entry will credit the allowance for doubtful accounts by $49,000 with a corresponding debit to the bad debt expense for $49,000.

The financial statements of a company reports net sales of $500,000 and its cost of goods sold is $150,000. Its accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. Its average inventory is $55,000. What is the average collection period for accounts receivable in days (rounded)?

43.8 days Accounts receivable turnover = 500,000/[(80,000 + 40,000)/2] = 8.333 Average collection period = 365/8.333 = 43.80

A corporation sells its goods on terms of 2/10, n/30. It has a receivables turnover ratio of 7.50. What is its average collection period (also known as the days in receivable ratio)?

48.67 days The accounts receivable turnover is net credit sales divided by average net accounts receivable; it is 7.5. The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover, or 365/7.5 = 48.67 days.

A corporation had net credit sales during the year of $400,000 and cost of goods sold of $150,000. The net accounts receivable at the beginning of the year was $60,000 and at the end of the year was $70,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,300,000. How much is the accounts receivables turnover?

6.15 The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its net accounts receivable average balance.The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $400,000/[($60,000 + $70,000)/2] = 6.15. The company's average accounts receivable for the year is $65,000. Its net credit sales are 6.15 times its average balance suggesting the company collected the equivalent of its average accounts receivable 6.15 times during the year.

A corporation had net credit sales during the year of $750,000 and cost of goods sold of $500,000. The balance of total assets at the beginning of the year was $1,200,000 and at the end of the year was $1,500,000. The net accounts receivables at the beginning of the year was $75,000 and at the end of the year was $110,000. How much is the accounts receivables turnover?

8.11 The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its net accounts receivable average balance. The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. Accounts receivable turnover = $750,000/[($75,000 + $110,000)/2] = 8.11 The company's average accounts receivable for the year is $92,500. Its net credit sales are 8.11 times its average balance suggesting the company collected the equivalent of its average accounts receivable 8.11 times during the year.

Which of the following is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company? Interest risk Concentration risk A concentration of credit risk Credit risk Payment risk

A concentration of credit risk A threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of a company is called a concentration of credit risk.

On December 14, Walton Company sold $4,000 of merchandise on account to a customer with terms 1/10, n/30. On December 20, the customer returned $500 of merchandise to Walton Company. Walton Company received no payments from that customer in December. On December 21, Walton Company received $2,000 from a different customer for merchandise to be delivered in January. What is Walton Company's accounts receivable on December 31?

A customer bought $4,000 of merchandise on account but returned $500 for a net purchase of $3,500. The customer did not pay during December. Another customer paid in advance which the seller would record as an increase in cash—not accounts receivable—and an increase in unearned revenue. Accounts receivable = $4,000 - 500 = $3,500

a method of accounting for bad debts that involves expensing accounts at the time they re determined to be uncollectible

direct write-off method

Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method? Retained Earnings is credited. Bad Debts Expense is credited. Accounts Receivable is credited. Allowance for Doubtful Accounts is credited. Cash is credited.

Accounts Receivable is credited. Under the allowance method, a write-off of a specific customer's account (or customers' accounts will require a journal-entry that reduce the company's Accounts Receivable and reduce the Allowance for Doubtful Accounts. Debit the Allowance for Doubtful Accounts and credit Accounts Receivable. No expense is recorded at this time because the expense is estimated and recognized as an adjusting entry

Which of the following is the correct sequence to report receivables on the balance sheet? Other receivables, accounts receivables, a 6-month note receivable A 6-month note receivable, accounts receivable, other receivables Accounts receivable, a 6-month note receivable, other receivables Accounts receivable, other receivables, a 6-month note receivable A 6-month note receivable, other receivables, accounts receivable

Accounts receivable, a 6-month note receivable, other receivables Receivables are assets that must be reported in the order of liquidity. Those expected to be converted into cash more quickly are reported first

a note that is not paid in full at maturity

dishonored note

Which of these is a generally accepted method for accounting for uncollectible accounts when a company has a significant amount of expected bad debt losses? - Deferral method of bad debt accounts - Allowance method for uncollectible accounts - Matched-pair method of accounting - Direct write-off method for uncollectible accounts - Present value method of discounting

Allowance method for uncollectible accounts Two methods exist for accounting for uncollectible accounts receivable (i.e., accounting for bad debt losses) (i) the direct write-off method of uncollectible accounts and (ii) the allowance method for uncollectible accounts. The direct write-off method often records bad debt expense in a period after revenue from the sale to the customer occurs so it is not a generally accepted method if the company's bad debt losses are expected to be significant. Only the allowance method for uncollectible accounts matches revenues and expenses in a manner acceptable to generally accepted accounting principles.

Which of these is a generally accepted method for accounting for uncollectible accounts when a company has a significant amount of expected bad debt losses? Matched-pair method of accounting Allowance method for uncollectible accounts Direct write-off method for uncollectible accounts Deferral method of bad debt accounts Present value method of discounting

Allowance method for uncollectible accounts Two methods exist for accounting for uncollectible accounts receivable (i.e., accounting for bad debt losses) (i) the direct write-off method of uncollectible accounts and (ii) the allowance method for uncollectible accounts. The direct write-off method often records bad debt expense in a period after revenue from the sale to the customer occurs so it is not a generally accepted method if the company's bad debt losses are expected to be significant. Only the allowance method for uncollectible accounts matches revenues and expenses in a manner acceptable to generally accepted accounting principles.

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $80,000 at year-end. The total credit sales were $2,500,000 for the year. Management estimates that 3.5% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $100 before the year-end adjusting entry for Bad Debt Expense?

Bad Debts Expense 2,900 Allowance for Doubtful Accounts 2,900 The Allowance for Doubtful Accounts needs an ending credit balance of 3.5% of $80,000 or $2,800. Since the pre-adjusted debit balance is $100, a credit of $2,900 is necessary to increase it to $2,800. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $2,900.

Which of the following identifies the similarity between the direct write‐off method and the allowance method of accounting for uncollectible accounts receivable? -Both methods are approved by generally accepted accounting principles (GAAP). - Both methods adhere to the matching principle. -Both methods involve a credit to a contra account when a customer's account is written‐off. - Both methods involve recording a credit to accounts receivable when a customer's account is written‐off.

Both methods involve recording a credit to accounts receivable when a customer's account is written‐off.

Net credit sales for the month are $6,000,000 for Stacy Clothiers. Its accounts receivable balance is $300,000. The allowance is calculated as 7% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $10,000 before adjustment. How much is the balance of the allowance account after adjustment?

Credit balance of $21,000 The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be equal to 7% times $300,000, or $21,000.

A bank holds a 60-day, 7%, $27,000 note. The maker of the note pays in full on the maturity date. Which of the following is part of the journal entry that the bank will record on the maturity date?

Credit to Interest Revenue for $315 The bank's journal entry will decrease Notes Receivable for the value of the note, recognize Interest Revenue for the term of the note, and increase the Cash account for the total owed by the maker including principal and interest.The bank's journal entry is: Debit: Cash 27,315 Credit: Notes Receivable 27,000 Credit: Interest Revenue 315 (i.e., $27,000 x 7% x 60/360 = $315)

When an uncollectible account is recovered after it has been written off, which of the following journal entries will be recorded first?

Debit Accounts Receivable and credit Allowance for Doubtful Accounts When an uncollectible account is recovered after it has been written off, two journal entries are recorded. The first journal entry is Accounts Receivable will be debited and Allowance for Doubtful Accounts will be credited (i.e., this reverses the journal entry that wrote-off the account). The second journal entry requires and a debit to Cash and a credit to Accounts Receivable (i.e., this records the customer's payment).

Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $120,000 at year-end and the total credit sales were $900,000. Management estimates that 4% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $600 before adjustment?

Debit Bad Debts Expense 4,200 Credit Allowance for Doubtful Accounts 4,200 Allowance for Doubtful Accounts needs an ending credit balance of 4% of $120,000 or $4,800. To increase the current credit balance of $600 to the required amount of $4,800, the account requires a credit of $4,200. The entry to estimate bad debts is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $4,200.

A company factors $100,000 of its receivables. The factor assesses a 2% service charge on the amount of receivables sold. What journal entry does the company record when factoring these receivables?

Debit Cash 98,000 Debit Service Charge Expense 2,000 Credit Accounts Receivable 100,000 Factoring $100,000 of receivables incurring a 2% service charge results in reducing accounts receivable by $100,000 in exchange for $98,000 while incurring a $2,000 service charge (i..e, $100,000 x 2% = $2,000). Debit cash for $98,000, debit the service charge expense account for $2,000, and credit accounts receivable for $100,000.

Schmidt Co. holds Murphy Inc.'s $10,000, 120-day, 6% note. What is the entry to be made by Schmidt Co. when the note is collected, assuming no interest has previously been accrued?

Debit Cash for $10,200, credit Notes Receivable for $10,000, and credit Interest Revenue for $200 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $10,000 × 6% × 120/360 = $200. Total cash received = $20,000 + 400 = $10,200.

Schmidt Co. holds Murphy Inc.'s $20,000, 90-day, 8% note. What is the entry to be made by Schmidt Co. when the note is collected, assuming no interest has previously been accrued?

Debit Cash for $20,400, credit Notes Receivable for $20,000, and credit Interest Revenue for $400 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $20,000 × 8% × 90/360 = $400. Total cash received = $20,000 + 400 = $20,400.

A company loaned $30,000 to a debtor on May 1, at 10% interest for 3 months. What adjusting entry should the company record on June 30 before preparing the financial statements on June 30?

Debit Interest Receivable for $500 and credit Interest Revenue for $500 Interest earned is calculated by multiplying the face value (i.e., principal) times the interest rate times the portion of the year that has passed since the note was issued. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. Interest = Principal x interest rate x time = $30,000 x 10% x 2/12 = $500 Remember, all interest rates are annual interest rates unless designated otherwise. Baker Co. is the creditor; it loaned money to the other company. Baker Co. records increases to Interest Receivable and Interest Revenue.

On August 2, Harding Corporation's customers buy $10,000 of merchandise using national credit cards (e.g., Visa) which charges a 4 percent fee. The corporation's journal entry includes the following: - A debit to cash for $10,000 - A debit to accounts receivable for $10,000 - A debit to service charge expense for $400 - A debit to sales revenue for $10,000 - A credit to service charge expense for $400

Debit cash 9600 Debit service charge expense 400 Credit Sales revenue 10,000

A 90-day promissory note is issued on September 18. What is the note's maturity date?

December 17 A 90-day note (or promissory note) is due 90 days after the date of issue. When counting days, ignore the date the note is issued but count the date it is paid (i.e., the due date). Since the note is issued on September 18, count 12 days in September (i.e., beginning with September 19 and ending with September 30). Counting all of October and November produces a subtotal of 73 days through the end of November (i.e., subtotal = 12 + 31 + 30 = 73 days). Therefore count 17 days in December. The note is due December 17.

Which one of the following is not one of the principles of managing accounts receivable? Evaluating the liquidity of receivables Accelerating cash receipts from receivables when necessary Monitoring collections Determining from which vendor credit should be requested Establishing a payment period

Determining from which vendor credit should be requested Managing accounts receivable involves five steps. These include (1) determining to whom to extend credit, (2) establish a payment period, (3) monitor collections, (4) evaluate the liquidity of receivables, and (5) accelerate cash receipts from receivables when necessary. The one that is considered the most critical is deciding on who gets credit and who doesn't. Requesting credit from a vendor is a concern for dealing with accounts payable rather than accounts receivable.

Writing‐off a specific customer's account receivable under the allowance method - does not affect the balance of cash. - must occur before the last day of the accounting period. - does not affect the balance of the allowance for doubtful Accounts. - decreases the cash realizable value of accounts receivable. - increases bad debt expense for the accounting period.

Does not affect the balance of cash Writing‐off a specific customer's account receivable under the allowance method reduces the allowance and it reduces accounts receivable.

The maturity value and the maturity date of a $40,000, 9%, 60‐day note receivable dated July 3 is

Maturity value = Principal plus interest where interest equals the principal times the interest rate per period times the number of periods the note is outstanding. Note: July has 31 days, including 28 days after July 3. August has 31 days so there are 59 days in July and August after July 3. One more day is needed to reach 60 days. The due date is September 1. Maturity value = $40,000 + $40,000 x 9% x 60/360 = $40,600 Maturity date = Sep. 1

At the beginning of the year, a company had accounts receivable of $1,000,000 and an allowance for doubtful accounts with a credit balance of $60,000. During the current year, sales on account were $12,000,000 and collections on account were $11,800,000. Also during the current year, the company wrote off $50,000 in uncollectible accounts. At year‐end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have a $75,000 credit balance so the company records the appropriate year‐end adjusting entry. How much did the cash realizable value increase or decrease during the current year?

Net realizable value = Accounts receivable - allowance for doubtful accounts Ending accounts receivable = Beginning accounts receivable plus sales on account minus cash collections from customers minus accounts receivable written‐off. Increase in net realizable value = Ending net realizable value - beginning net realizable value Beginning net realizable value = $1,000,000 - 60,000 = $940,000 Ending accounts receivable = $1,000,000 + 12,000,000 - 11,800,000 - 50,000 = $1,150,000 Ending allowance for doubtful accounts = $75,000 (given) Ending net realizable value = $1,150,000 - 75,000 = $1,075,000 Increase in net realizable value = Ending net realizable value - beginning net realizable value = $1,075,000 - 940,000 = $135,000

Oak Company uses the percentage-of-receivables method for recording bad debts expense. The accounts receivable balance is $90,000 at year-end. The total credit sales were $2,600,000 for the year. Management estimates that 4% of receivables will be uncollectible. What adjusting entry should be made if the Allowance for Doubtful Accounts has a debit balance of $300 before the year-end adjusting entry for Bad Debt Expense?

The Allowance for Doubtful Accounts needs an ending credit balance of 4% of $90,000 or $3,600. Since the pre-adjusted debit balance is $300, a credit of $3,900 is necessary to increase it to $3,600. The journal entry will record a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts for $3,900.

A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should include

a debit to Service Charge Expense for $18,000. The factor purchases the accounts receivable but charges a fee or commission. The company selling the receivables to the factor receives cash but charges the fee to an expense account. Debit cash for $882,000 (i.e., $900,000 - 2% x $900,000) Debit Service Charge Expense for $18,000 (i.e., 2% x $900,000) Credit accounts receivable by $900,000

Under the direct write-off method of accounting for uncollectible accounts

a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. To account for uncollectible accounts, companies use either (1) the direct write-off method or (2) an allowance method. Under the direct write-off method, a company records an increase to bad debt expense and a decrease to accounts receivable when the company determines that a receivable from a particular customer is uncollectible. The direct write-off method shows only actual losses from uncollectible receivables. It does not record estimated bad debts, and it does not use the allowance for uncollectible accounts.

Under the direct write‐off method of accounting for uncollectible accounts - bad debt expense is always recorded in the period in which the revenue was recorded. - the going concern assumption is emphasized. - balance sheet relationships are emphasized. - the allowance account is increased for the actual amount of bad debt at the time of write‐off. - a specific account receivable is decreased for the actual amount of the bad debt at the time of the write‐off.

a specific account receivable is decreased for the actual amount of the bad debt at the time of the write‐off. Using the direct write‐off method for uncollectible accounts receivable does not require the company estimate the amount uncollectible and it does not require a year‐end adjusting entry. Rather, it requires the company to write‐off specific customers' accounts as bad debt expense when it becomes known that the customer will not pay.

an analysis of customer balances by the length of time they have been unpaid

again the accounts receivable

a method of accounting for uncollectible accounts receivable that involves using an allowance for doubtful accounts

allowance method

Bad Debt Expense is reported on the income statement as - a contra revenue account. - Other income and expenses. - an operating expense. - An expense subtracted from net sales to determine gross profit. - part of cost of goods sold.

an expense subtracted from net sales to determine gross profit Expenses are reported on the income statement. IN a multiple‐step income statement, expenses are partitioned. Bad debt expense belongs among the operating expenses with advertisement expense, salaries and wages expense, and utilities expense.

the average amount of time that a receivable is outstanding, calculated by dividing 365 days by the receivables turnover ratio

average collection period

Short-term notes receivable are reported in the current assets section of the balance sheet at

cash realizable value. Companies report accounts receivable, short-term notes receivable, and other receivables in the current asset section of the balance sheet at their expected cash realizable value. By the way, a synonym for cash realizable value is net realizable value. Cash (net) realizable value is measured as face value minus the allowance for doubtful accounts.

A company uses the allowance method for uncollectible accounts. Last year, a customer purchased $100 of services on account from the company. In the current year, the company is notified that the customer is bankrupt and will not pay the company the amount owed. What journal entry does the company record when it is notified that the customer will not pay?

debit Allowance for Doubtful Accounts and credit Accounts Receivable When using an allowance method for uncollectible accounts, a company records a year-end adjusting entry by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts. When a specific customer's account is identified as uncollectible, the company reduces the accounts receivable by crediting that account and it reduces the Allowance for Doubtful Accounts by debiting it.

1. A company uses the allowance method for uncollectible accounts. Last year, a customer purchased $100 of services on account from the company. In the current year, the company is notified that the customer is bankrupt and will not pay the company the amount owed. What journal entry does the company record when it is notified that the customer will not pay? - debit Bad Debt Expense and credit Accounts Receivable. - debit Allowance for Doubtful Accounts and credit Accounts Receivable. - debit Bad Debt Expense and credit Cash. - debit Bad Debt Expense and credit Allowance for Doubtful Accounts. - debit Allowance for Doubtful Accounts and credit Bad Debt Expense.

debit Allowance for Doubtful Accounts and credit Accounts Receivable Using the allowance method for uncollectible accounts receivable requires the company to estimate the amount of receivable deemed uncollectible at year‐end even before specific customers become known as non‐payers. This estimation occurs at year‐end prior to preparing financial statements. It involves an adjusting entry to recognize the expense (i.e., bad debt expense) and to change the allowance account's balance to equal the amount deemed or estimated to be uncollectible (i.e., credit the Allowance for Doubtful Accounts). Sometimes the allowance for doubtful accounts is called the allowance for uncollectible accounts

A company accepted a customer's Visa card as payment for $600 of merchandise it sold to the customer. The bank that issued the credit card charges a 2% credit card fee. The company's journal entry to record this transaction will include

debit to Service Charge Expense of $12 The sale revenue is $600, but the retailer incurs a 2% fee so it collects 98% of the revenue. It collects $588. It also incurs a $12 service charge fee as an expense.

A company accepted a customer's Visa card as payment for $900 of merchandise it sold to the customer. The bank that issued the credit card charges a 4% credit card fee. The company's journal entry to record this transaction will include

debits to Cash $864 and Service Charge Expense $36. The sale revenue is $900, but the retailer incurs a 4% fee so it collects 96% of the revenue. It collects $864. It also incurs a $36 service charge fee as an expense.

When an account is written off using the allowance method, accounts receivable

decreases and the allowance account decreases. When an account receivable is written-off by a company using the allowance method, the company reduces accounts receivable (i.e, which reduces assets) and it reduces the allowance for doubtful accounts (which reduces a contra asset and increases assets). The net effect on total assets is zero. Under the allowance method of accounting for uncollectible accounts, the net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.

Writing-off a specific customer's accounts receivable under the allowance method

does not affect the balance of Cash. Under the allowance method for uncollectible accounts, a company estimates its bad debt expense at the end of each accounting period (e.g., year) and increases its allowance for doubtful accounts. When specific customers' accounts are identified as uncollectible, the company reduces its allowance for uncollectible accounts and reduces its accounts receivable.

a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers

factor

The balance of Allowance for Doubtful Accounts prior to recording the end of year adjusting entry to record Bad Debt Expense - equals the Bad Debt Expense to be recorded as a year-end adjusting entry. - will never show a debit balance at this stage in the accounting cycle. - equals the Bad Debt Expense to be recorded on the income statement. - is relevant when using the percentage-of-receivables basis. - is relevant when using the direct write-off method.

is relevant when using the percentage-of-receivables basis. The balance of Allowance for Doubtful Accounts prior to recording the end of year adjusting entry to record Bad Debt Expense is relevant when using the percentage-of-receivables basis. The purpose of the adjusting entry for bad debts is to record the bad debt expense and to adjust the balance of the Allowance for Doubtful Accounts from its unadjusted balance to a balance based on a certain percentage of outstanding accounts receivable.

the party in a promissory not who is making the promise to pay

maker

a written promise to pay a specified amount of money on demand or at a definite time

promissory note

a liquidity measure computed as net credit sales divided by average net receivables

receivables turnover ratio

After the end‐of‐period adjusting entries, the balance of the allowance for uncollectible accounts - reports the amount of accounts receivable written‐off in the year. - reports the amount of a company's current period credit sales expected to be uncollectible. - reports the amount of the current period's bad debt expense. - reports the amount of a company's accounts receivable expected not to be collected.

reports the amount of a company's accounts receivable expected not to be collected. The allowance method requires an estimation of the amount of accounts receivable deemed to be uncollectible.

Under the allowance method for uncollectible accounts, when a specific account is written off - equity will increase. - net income will decrease. - total assets will increase. - total assets will be unchanged. - total assets will decrease.

total assets will be unchanged. When an account receivable is written-off by a company using the allowance method, the company reduces accounts receivable (i.e, which reduces assets) and it reduces the allowance for doubtful accounts (which reduces a contra asset and increases assets). The net effect on total assets is zero. Under the allowance method of accounting for uncollectible accounts, the net realizable value of accounts receivable in the balance sheet is the same before and after an account is written off.

amounts owed by customers on account

trade receivables

Accounts receivables that result from sales transactions are often called

trade receivables Trade receivables result from sales transactions with customers. Accounts receivable are trade receivables. Notes receivable may or may not arise from sales transactions with customers. Notes receivable arising from sales transactions are trade receivables, and notes receivable not arising from sales transactions with customers are not trade receivables.