ACG2021 Chapter 08
On January 1, Putnam Wholesale Company's Allowance for Doubtful Accounts had a credit balance of $21,000. During the year, it had net credit sales of $900,000 and it had $20,000 of uncollectible accounts receivable that were written off. Past experience indicates that the allowance should be 6% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 is $200,000, what is the required credit adjustment to the Allowance for Doubtful Accounts at December 31?
$11,000 Solution: After the write-offs are recorded (but before the year-end adjusting entry), Allowance for Doubtful Accounts will have a credit balance of $1,000 ($21,000 credit beginning balance combined with a $20,000 debit for the write-offs). Using the percentage of receivables basis, the balance in the allowance account needs to be a credit balance of $12,000 (i.e., $200,000 x 6%). In order to have an ending balance of $12,000, a credit entry of $11,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $11,000. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
Lansing Construction Company had the following receivables: Accounts receivable $ 9,000 Employee advances $ 1,000 Income taxes refundable 2,000 Interest receivable 500 Loans to company officers 1,200 Notes receivable (i.e., promissory notes from customers in exchange for services performed by Lansing Construction Co. 3,300 Notes receivable (i.e., promissory notes obtained from creditors who purchased used equipment from Lansing Construction Co. 4,000 Based on this information, what is the company's "Trade Receivables"?
$12,300 Trade receivables derive from transactions with a company's customers. Virtually all accounts receivable are trade receivables. If a note receivable results from a sale on account with a customer, it is considered to be a trade receivable. However, other notes receivable and other receivables are not trade receivables. Trade receivables = $9,000 + 3,300 = $12,300
What is the maturity value of a $30,000, 12%, 3-month note receivable dated March 1?
$30,900 Solution: The maturity value is the face value (i.e., principal) plus interest for the term of the note. Interest earned is calculated by multiplying the principal times the interest rate times the length 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. Interest = Principal x interest rate x time = $30,000 x 12% x 3/12 = $900 Remember, all interest rates are annual interest rates unless designated otherwise. Maturity value = Principal + interest = $30,000 + 900 = $30,900. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
How much accrued interest should be reported on the payee's December 31 balance sheet on a $8,000, 9%, 9-month note receivable issued on May 1?
$480 Solution: 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 = $8,000 x 9% x 8/12 = $480 Remember, all interest rates are annual interest rates unless designated otherwise. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
The following information relates to the beginning of the year: Accounts receivable, $150,000 Allowance for doubtful accounts (credit balance), $7,500 During the current year, sales on account were $850,000 and collections on account were $775,000. Also during the current year, the company wrote off $6,000 in uncollectible accounts. At year-end, an analysis of outstanding accounts receivable indicated that the allowance for doubtful accounts should have an $8,500 credit balance so the company records the appropriate year-end adjusting entry. How much did the cash realizable value change during the current year?
$68,000 increase Ending accounts receivable, $150,000 + 850,000 - 775,000 - 6,000 = 219,000 Ending allowance for doubtful accounts, $8,500 (given) Ending cash realizable value, $219,000 - 8,500 = 210,500 Beginning cash realizable value, $150,000 - 7,500 = $142,500 Increase (decrease) in cash realizable value, $210,500 - 142,500 = $68,000 Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
Edward Corporation had net credit sales during the year of $750,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $75,000 and at the end of the year was $110,000. 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. How much is the accounts receivables turnover?
8.11 Solution: The accounts receivable turnover ratio measures the liquidity of receivables. This ratio measures the number of times a company collects its accounts receivable's 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. Chapter 8, Learning objective 8: Identify ratios to analyze a company's receivables.
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? -Payment risk -Concentration risk -Credit risk -A concentration of credit risk -Interest risk
A concentration of credit risk Solution: 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. Chapter 8, Learning objective 7: Describe the principles of sound accounts receivable management.
On May 2, Cartwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What journal entry will Cartwright Company record on May 2?
A debit to Notes Receivable for $3,000 and a credit to Accounts Receivable for $3,000 Solution: Settling an account receivable by replacing it with a note receivable suggests that Notes Receivable will be debited for $3,000 and Accounts Receivable will be credited for $3,000. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which of these statements about national credit card (e.g., Visa) sales is correct? -A retailer's acceptance of a national credit card is a form of factoring the receivable by the retailer. -The retailer considers sales involving the use of a national credit card to be sales on account. -The retailer waits at least 24 hours to receive payment from the customer who used the credit card at a retailer. -The issuer must assess the customer's credit worthiness when the customer uses a national credit card to make a purchase.
A retailer's acceptance of a national credit card is a form of factoring the receivable by the retailer. Solution: With a credit card sale, there is no wait for payment by the retailer. Upon notification of a credit card charge from a retailer, the bank that issued the card immediately adds the amount to the seller's bank balance. So, the retailer receives payment at the time the credit card is accepted from the customer as a form of factoring (or selling a receivable by the retailer). Also, the retailer has no concerns about the credit worthiness of the customer when the customer uses a credit card because the credit card issuer guarantees payment. It is the credit card issuer that assesses the card holder's credit worthiness, and this occurs when the issuer issues the card. In sum, the retailer records the sales revenue for the full invoice price and records a small service charge expense and cash. For example, a $100 sale with a 2% fee includes a debit to Cash for $98, a debit to Service Charge Expense for $2, and a credit to Revenue for $100. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable? -Loss on Notes Receivable -Bad Debts Expense -Gain on Notes Receivable -Accounts Receivable -Allowance for Doubtful Accounts
Accounts Receivable Solution: The entry for a dishonored note receivable includes a debit to Accounts Receivable and credit to Notes Receivable. The company will then pursue collection along with its other receivables. Allowance for Doubtful Accounts is debited only when amounts are written off as uncollectible. While the note receivable may result in a loss, it is normally converted to accounts receivable so the company can pursue collection. Bad debts expense is used only to estimate doubtful accounts in the adjusting process. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which of the following are used to compute cash realizable value? -None of these -Bad Debt Expense and Allowance for Doubtful Accounts -Bad Debt Expense and Accounts Receivable -Accounts Receivable and Allowance for Doubtful Accounts -Cash and Allowance for Doubtful Accounts
Accounts Receivable and Allowance for Doubtful Accounts Solution: 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 of accounts receivable minus the allowance for doubtful accounts. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which one of the following is part of the transaction that is recorded when an account is written off under the allowance method? -Accounts Receivable is credited. -Cash is credited. -Allowance for Doubtful Accounts is credited. -Bad Debts Expense is credited. -Retained Earnings is credited.
Accounts Receivable is credited. Solution: 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. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
In September, Oliver Company sold merchandise on account to Mr. Reed for $200 with terms 1/10, n/30. Oliver Company uses the percentage of receivables basis for estimating uncollectible accounts on December 31. On April 18, Oliver Company determines that it will not collect the amount due from Mr. Reed. Prepare the journal entry to record the write-off on April 18.
Allowance for Doubtful Accounts 200 Accounts Receivable 200 Solution: Accrual accounting requires the allowance method of accounting for bad debts which involves estimating uncollectible accounts at the end of each period. This method provide a better matching of revenues and expenses than the direct write-off method of accounting for uncollectible accounts. Several alternative procedures exist for estimating uncollectible accounts. Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Under the allowance method, Bad Debts Expense is estimated and recorded at the end of the period as an adjusting entry. Simultaneously, the Allowance for Doubtful Accounts balance is adjusted to reflect the estimated portion of Accounts Receivable not expected to be collected. Writing-off a specific customer's account receivable requires a reduction in the Accounts Receivable. Writing-off an account under the allowance method requires a decrease in the amount set aside in the Allowance for Doubtful Accounts. The adjusting journal entry includes a debit to the Allowance for Doubtful Accounts and a credit to Accounts Receivable for the amount written-off. Since the customer did not pay within the discount period, the customer's opportunity for a discount had been forfeited. Thus, the full invoice price was the amount due, and it is the amount written-off by the company. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
Which statement is true about reporting receivables on the balance sheet? -Bad Debts Expense is shown as a deduction from Accounts Receivable on the balance sheet. -Allowance for Doubtful Accounts is shown as an addition to Accounts Receivable on the balance sheet. -Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet. -Bad Debts Expense is subtracted from Accounts Receivable and is then shown as a deduction from Accounts Receivable on the balance sheet. -Bad Debts Expense and Allowance for Doubtful Accounts are shown as a deduction from Accounts Receivable on the balance sheet.
Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet. Solution: Allowance for Doubtful Accounts is a contra asset account that is shown as a deduction from Accounts Receivable on the balance sheet in the current asset section. Chapter 8, Learning objective 5: Describe the entries to record the disposition of notes receivable.
In the table below the information for four companies is provided. Company Accounts Receivable turnover Alpha 16.0 Beta 13.1 Gamma 12.5 Delta 10.9 Industry Average 13.0 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?
Alpha Solution: The accounts receivables turnover is computed by dividing net credit sales by average net accounts receivable. It is a measure of liquidity. The higher the accounts receivable turnover, the higher the likelihood of being able to pay its own liabilities as they come due. The highest accounts receivable turnover and the lowest average collection period: Alpha Company. Chapter 8, Learning objective 8: Identify ratios to analyze a company's receivables.
At what value are accounts receivable reported on the balance sheet?
At what value are accounts receivable reported on the balance sheet? Solution: Accounts receivable are reported at cash realizable value. Also, the terms cash realizable value and net realizable value are synonyms. They both refer to the total amount due from accounts receivable less an estimate for doubtful accounts. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
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 Solution: 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. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $100,000 at year-end and the total credit sales were $800,000. 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 $800 before adjustment?
Bad Debts Expense 3,200 Allowance for Doubtful Accounts 3,200
Which one of the following statements is true? -Bad Debts Expense and Allowance for Doubtful Accounts are both temporary accounts and are closed at the end of the fiscal period. -Bad Debts Expense is a permanent account and remains open at the end of the fiscal period, while Allowance for Doubtful Accounts is a temporary account and is closed at the end of the fiscal period. -Bad Debts Expense is a temporary account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a permanent account and remains open at the end of the fiscal period. -None of these -Bad Debts Expense and Allowance for Doubtful Accounts are both permanent accounts and neither are closed at the end of the fiscal period.
Bad Debts Expense is a temporary account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a permanent account and remains open at the end of the fiscal period. Solution: Bad Debts Expense is a temporary (i.e., nominal) account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a permanent (i.e., real) account and remains open at the end of the fiscal period with the year-end ending balance becoming the next year's beginning balance. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
A bank holds a 30-day, 9%, $20,000 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 Notes Receivable for $20,000 Solution: 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 20,150 Credit: Notes Receivable 20,000 Credit: Interest Revenue 150 (i.e., $20,000 x 9% x 30/360 = $150) Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which one of the following is not one of the principles of managing accounts receivable? -Evaluate the liquidity of receivables -Accelerating cash receipts from receivables when necessary -Determining to whom to extend credit -Establishing a payment period -Cross-indexing journal-entries with the postings to the ledger
Cross-indexing journal-entries with the postings to the ledger Solution: 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. Cross-indexing journal-entries with postings to the ledger is merely a reference to two sequential steps of the accounting cycle. Chapter 8, Learning objective 7: Describe the principles of sound accounts receivable management.
When an uncollectible account is recovered after it has been written off, which of the following journal entries will be recorded first? -Debit Allowance for Doubtful Accounts and credit Accounts Receivable -Debit Account Receivable and credit Bad Debt Expense -Debit Cash and credit Allowance for Doubtful Accounts -Debit Cash and credit Accounts Receivable -Debit Accounts Receivable and credit Allowance for Doubtful Accounts
Debit Accounts Receivable and credit Allowance for Doubtful Accounts Solution: 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). Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
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 Solution: 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. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Laurel Company factors $400,000 of receivables to Hardy Factors. Hardy Factors assesses a 3% fee on the amount of receivables sold. Laurel Co. factors its receivables to Hardy Factors regularly. What journal entry does Laurel Co. make when the factoring occurs?
Debit Cash for $388,000, debit Service Charge Expense for $12,000, and credit Accounts Receivable for $400,000 Solution: This entry records the receipt of cash as a debit for $388,000, recognizes the service charge expense based on a percentage of the receivables as a debit to Service Charge Expense for $12,000, and reduces accounts receivable with a credit for the face value of the receivables that are sold, which is $400,000. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
Baker Co. loaned $30,000 to Idaho Co. on May 1, at 10% interest for 3 months. What adjusting entry should Baker Co. record on June 30 before preparing the financial statements on June 30?
Debit Interest Receivable for $500 and credit Interest Revenue for $500 Solution: 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. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Kensington Company sold $7,000 of merchandise to customers who charged their purchases with a bank credit card. Kensington's bank charges it a 5% fee. Which one of the following is part of the journal entry to record this transaction? -Credit to Service Charge Expense for $350 -Debit to Cash for $6,650 -Debit to Cash for $7,000 -Debit to Sales for $7,000 -Credit to Sales for $6,650
Debit to Cash for $6,650 Solution: The fee is 5% times $7,000, or $350. Kensington will receive the difference between the face amount of the receivables and the fee, or $6,650. The journal entry includes a debit to cash for $6,650, a debit to Service Charge Expense for $350, and credit to sales for $7,000. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
A 90-day promissory note is issued on September 18. What is the note's maturity date?
December 17 Solution: 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. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
When a merchandiser sells goods, it increases Accounts Receivable by debiting it and it _________ Sales Revenue by __________ it.
Increases; crediting Solution: When a merchandiser sells goods, it increases Accounts Receivable by debiting it and increases Sales Revenue by crediting it. Revenues are increased with credits and expenses are increased with debits. Chapter 8, Learning objective 2: Explain how accounts receivable are recognized in the accounts.
Which of the following should be classified as an "other" receivable? -Payable receivable -Trade receivables -Notes receivable -Interest receivable -None of these
Interest receivable Solution: Accounts receivable (also called trade receivables) and notes receivables (sometimes considered to be a trade receivable) are both financial instruments typically accepted from customers for the value of a transaction. Notes receivable involve a formal instrument of credit and almost always have interest charges. Interest receivable occurs from loans and results because of the time value of money; interest receivable is one of the receivables in the other receivable category. Others examples of other receivables include receivables due to loans to company officers, advances to employees, income taxes refundable. Chapter 8, Learning objective 1: Identify the different types of receivables.
A 120-day note dated March 5, would mature on
July 3. Solution: If the note is described in terms of days (e.g., 120-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. This note is describes in terms of days so count days. March = 31 - 5 = 26 days outstanding (i.e., do not count the date of issue or days preceding it). April = 30 days May = 31 days June = 30 days Subtotal = 26 + 30 + 31 + 30 = 117. So, 3 more days are needed to reach 120 days. Due date = July 3 Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which of the following accounts is debited when a company factors its accounts receivable? -Interest receivable -Loss on Sale of Accounts Receivable -Service Charge Expense -Accounts Receivable -Interest Expense
Service Charge Expense Solution: Service Charge Expense and Cash are the two accounts debited when accounts receivable are factored. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
A promissory note will likely be used in all of the following settings except -when the company lends or borrows money. -None of these -when the party making the note is a high risk creditor. -in settlement of accounts receivable. -when the amount of the transaction and the credit period exceed normal limits.
when the party making the note is a high risk creditor. Solution: Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement. Notes receivable may be used (1) when the company lends or borrows money, (2) when the amount of the transaction and the credit period exceed normal limits, and (3) in settlement of accounts receivable. Beware of high risk creditors; there is a high risk they will not pay when an amount is due. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Net credit sales are $900,000, average inventory totals $60,000, average net receivables total $50,000, and the allowance for doubtful accounts totals $5,000. How much is the average collection period (also known as the days in receivable ratio)?
20.277 days Solution: There are two steps: The accounts receivable turnover is net credit sales divided by average net accounts receivable = $900,000/$50,000 = 18 times The average collection period is 365 divided by the accounts receivable turnover ratio = 365/18 = 20.277 days. Chapter 8, Learning objective 8: Identify ratios to analyze a company's receivables
Star Corporation sells its goods on terms of 3/10, n/30. It has a receivables turnover ratio of 6.00. What is its average collection period (also known as the days in receivable ratio)?
60.83 days Solution: The average collection period is computed by dividing the number of days in the year by the accounts receivable turnover, or 365/6 = 60.83 days. Chapter 8, Learning objective 8: Identify ratios to analyze a company's receivables.
Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. What should Good Stuff Retailers debit as a result of this transaction?
Cash for $48,000 and Service Charge Expense for $2,000 Solution: The entry includes a credit to Sales for $50,000, a $48,000 debit to Cash, and a debit to Service Charge Expense for $2,000. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
Net credit sales for the month are $5,000,000 for Karl Clothiers. Its accounts receivable balance is $180,000. The allowance is calculated as 8.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment. How much is the balance of the allowance account after adjustment?
Credit balance of $15,300 Solution: The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be a credit balance equal to 8.5% times $180,000, or $15,300. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
Michael Co. accepts a $4,000, 3-month, 12% promissory note in settlement of an account with Tony Co. Michael Co. records this transaction as
a debit to Notes Receivable for $4,000 and a credit Accounts Receivable for $4,000. Solution: On the date Michael Co. accepts the note in settlement of an account, Notes Receivable is debited for $4,000 and Accounts Receivable is credited for $4,000. Interest is accrued only with the passage of time. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
An analysis and aging of the accounts receivable of Raja Company at December 31 reveal the following data before year-end adjusting entries: Accounts receivable, $1,200,000; Allowance for doubtful accounts balance before adjustment (credit balance), $24,000; Amounts expected to become uncollectible, $115,000. How much is the cash realizable value (i.e., net realizable value) of the accounts receivable at December 31, after adjusting entries?
$1,085,000 Solution: The net realizable value of the accounts receivable is accounts receivable less the ending balance in the Allowance for Doubtful Accounts. In this case, accounts receivable is $1,200,000 and the ending balance in Allowance for Doubtful Accounts will be $115,000 after the year-end adjusting entry has been recorded. This will result in cash realizable value (i.e., net realizable value) of $1,200,000 less $115,000, or $1,085,000. Chapter 8, Learning objective 3: Describe the methods used to account for bad debts.
On January 5, Kelsey Company sold merchandise on account to Buyer Co. for $1,500 with terms 3/10, n/30. On January 10, Buyer Co. returns merchandise worth $300 to Kelsey Company. On January 14, Buyer Co. pays the balance due. What is the amount of cash received by Kelsey Company on January 14?
$1,164 Solution: The amount received on January 14 is $1,164. Because payment is made within the discount period of 10 days, the amount received is $1,200 ($1,500 - return of $300) minus the 3% discount of $36 ($1,200 x 3%), for a cash amount of $1,164. Chapter 8, Learning objective 2: Explain how accounts receivable are recognized in the accounts.
Which one of the following is not a method used by companies to accelerate cash receipts? -Offering discounts for early payment -Allowing customers to settle their accounts by issuing notes -Selling receivables to a factor -Accepting national credit cards for customer purchases -These are all methods of accelerating cash receipts
Allowing customers to settle their accounts by issuing notes Solution: Management can accelerate the collection of cash from receivables by selling its receivables, by allowing customers to pay with national (bank) credit cards, and by offering discounts for early payment. Chapter 8, Learning objective 9: Describe methods to accelerate the receipt of cash from receivables.
At what amount is a short-term note receivable recorded on the issue date?
Face value Solution: Short-term notes receivable are recorded at face value, which is the principal amount of the note. Chapter 8, Learning objective 4: Compute the interest on notes receivable.
Which one of the following is not one of the five basic issues in accounting for notes receivable? -Disposing of notes receivable -Recognizing notes receivable -Valuing notes receivable -Computing the present value of notes receivable -Realizing notes receivable
Realizing notes receivable Solution: The five basic issues in accounting for notes receivable are 1) determining the maturity date, 2) computing interest, 3) recognizing notes receivable, 4) valuing notes receivable, and 5) disposing of notes receivable. Chapter 8, Learning objective 4: Compute the interest on notes receivable.