Chapter 8 - SmartBook

What 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.

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

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

12.0 times

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

Accounts Receivable are debited in the period the revenue is recognized. Bad Debt Expense is estimated and recorded with an adjusting entry. 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

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.

What would be the effect of forgetting to record the adjusting entry for estimated bad debts?

Assets and stockholders' equity would be overstated.

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

The allowance method requires that ____.

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

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

Bad debt expense to decrease. Sales to decrease.

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

Expense Recognition (matching) Principle

Why is Bad Debt Expense an estimate?

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

The receivable turnover ratio is computed as ___.

Net Sales Revenue / Average Net Receivables

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

Notes Receivable *Notes Payable involves interest expense (not interest revenue). *Accounts Receivable is non-interest bearing.

Match the following methods for estimating bad debts with their descriptions. Percentage of Credit Sales Aging of Accounts Receivable

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.

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.

The days to collect ratio provides what kind of information?

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

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

The contra-asset account called Allowance for Doubtful Accounts

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

Write off the uncollectible account and its corresponding allowance from the accounting records.

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

a write-off

Accounts Receivable represent ____.

amounts owed to a business by its customers.

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

an asset called Notes Receivable. *The company receives an interest bearing note from its employees and debits Notes Receivable (+A) and credits Cash (-A). *Accounts Receivable are similar to Notes Receivable except they are not interest bearing or formal written notes.

The challenge businesses face when estimating the allowance for previously recorded sales is that ___.

at the time of the sale, it is not known which particular customer will be a "bad" customer.

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

bad debt expense

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

contra credit

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

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

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

exceed

When accounting for accounts receivable, a primary objective is to ___.

not overstate assets and stockholders' equity by the estimated amount of bad debt.

A receivable write-off removes a non-paying customer's account receivable and ___.

removes the same amount from Allowance for Doubtful Accounts.

rank companies A-C based on how favorable their receivables turnover ratio is (from most favorable on top to the least favorable)

Company B: 5.6 times Company A: 3.4 times Company C: 2.4 times

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ____.

Credit to Allowance for Doubtful Accounts Debit to Bad Debt Expense

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

Credit to Cash of $1,000 Debit to Notes Receivable of $1,000 *cash is decreased with a credit, not a debit. *Interest is not generated or recorded until time has passed.

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

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts.

Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually.

Debit Notes Receivable and credit Cash. Debit Interest Receivable and credit Interest Revenue. Debit Cash and Credit Interest Receivable (or Interest Revenue if not previously recorded). Debit Cash and Credit Notes Receivable, Interest Revenue and Interest Receivable.

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

It is collecting the principal on amounts lent earlier.

Match the description with the appropriate method(s).

Percentage of Credit Sales: Simpler to apply but less accurate. Aging of Accounts Receivable: Uses more detailed data and is more accurate. Direct Write Off: Not considered an acceptable method under GAAP.

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

Percentage of credit sales method

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.

What situation does a company issue a notes 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.

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

The establishment of a note.

What is recorded with a debit to Cash and a credit to Notes Receivable?

The receipt of the principle payment.

The estimated amount of credit sales that customers will likely fail to pay is recorded as bad debt expense in which period?

The same period as credit sales.

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

Total assets remain the same.

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

A sale on account is recorded with a debit to ____ ____ and a credit to ___ ___.

Accounts Receivable Sales Revenue

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

credit decrease

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

The entry to record the issuance of a note receivable is ___.

debit Notes Receivable and credit Cash.

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. *The collection of a note receivable is recorded with a debit to Cash (+A) and a credit to Notes Receivable (-A). Interest on the note is recorded separately.

The allowance method is a method of accounting that ___ for estimated bad debts.

decreases net accounts receivable