Ch 8 Study

Why would a company debit Interest Receivable?

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

the aging method determines the desired balance in the Allowance account and not the

amount of the adjustment

is deferred revenue a contra-asset account?

no (Deferred Revenue is a liability account and reports the amount collected in advance of the performance of the service or delivery of the good)

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $9,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of

$1000 credit

bad debt expense

an expense account to record losses from extending credit

Which of the following are advantages of using national credit cards?

avoid lengthy cash collection periods reduction of bad debts expense

why do write offs have no effect on net income

both the A/R and ADA accounts decrease and you are left with the same difference between the two numbers

write-off of a specific customer's account entry

debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable

Bad Debt Expense is a cost of

extending credit to customers

Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

percentage of credit sales

Allowance for Doubtful Accounts is a permanent account true or false

true

True or false: GAAP require end-of-period adjustments for the estimated bad debts in the period of the credit sale even though the specific, non-paying customers have not yet been identified.

true (The expense recognition principle requires an estimated expense be reported in the same period as the related credit sale rather than later when the customer is identified.)

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 less than (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)

(study this) 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 (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.)

In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals

$760

Allowance method approach two steps

1. Record the estimated bad debts in the period credit sales occur, using an end-of-period adjustment 2. Remove ("write off") specific customer balances when they are known to be uncollectible

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

Allowance for Doubtful Accounts of $1,000 (The $50 credit in the unadjusted Allowance for Doubtful Accounts needs to be adjusted to the desired $1,000 credit balance based on an aging of receivables, not $950) Bad Debt Expense of $950

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

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

bad debts must be estimated based on either

a percentage of credit sales or the aging of accounts receivable

typical sequence of accounting for sales made on account using the allowance method?

accounts receivable are debited in the period revenue is recognized, bad debt expense is estimated and adjusted for, specific customer balances are written off

Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance

aging of accounts receivable method

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

Using the allowance method, Bad Debt Expense is recorded

as an estimate in the period of the related credit sales

ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy?

credit card companies charge fees

The adjusting entry to record the allowance for doubtful accounts includes a

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a

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

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

estimated amount of uncollectibles was greater than the amounts actually written off

Bad Debt Expense on the income statement will always equal the Allowance for Doubtful Accounts on the balance sheet true or false

false (Bad Debt Expense is a temporary account and is closed into Retained Earnings at the end of the accounting period. Doubtful accounts 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 only reports the amount of only the current period credit sales expected to not be collected)

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 credit 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.

less than

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

less than

Under accrual basis accounting, interest revenue is earned over time. Rather than record the interest earned as each day passes, VFC waits until it either

receives an interest payment or reaches the end of its accounting period.

difference between percentage of credit sales or aging of accounts receivable

simpler to apply, aging uses more detailed data and is more accurate

The 2 steps required using the allowance method, are to later

write-off specific customer balances when they are known to be uncollectible

is bad debt expense an estimate

yes

The 2 steps required using the allowance method, are to first

make an end-of-period adjustment to record the estimated bad debts

Estimates the allowance for doubtful accounts based on the age of each account receivable

aging of accounts receivable

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with

credits

effect of ADA on net receivables

when ADA goes up, the net receivables go down because you are taking away from accounts receivable