Corporate Financial Reporting 1 Chapter 7

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible.

When all or a portion of an account receivable is determined to be uncollectible, what occurs?

The amount of the receivable is written off.

Under the allowance method, when is bad debt expense recognized?

when the allowance is created

When a receivable is written off, which of the following occurs? (Select all that apply.)

Accounts receivable is reduced the allowance for uncollectible accounts is reduced.

Which of the following is a contra account to accounts receivable?

Allowance for sales returns

The following information is taken from Landon Corp.'s accounting records: Account Beginning Balance Ending Balance Accounts Receivable $100,000 $130,000 Allowance for Uncollectible Accounts 12,000 16,000 During the year, Landon wrote off $7,000 of accounts receivable that were uncollectible. The adjustment to record bad debt expense at the end of the period was (Select all that apply.)

credit to Allowance for Uncollectible Accounts for $11,000. debit to Bad Debt Expense for $11,000.

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

credit to Service Revenue, $41,000.

The income statement approach for estimating bad debts focuses on

current year's credit sales.

When an accounts receivable is written off, which account is effected?

Allowance for uncollectible accounts

When a previously written off account is collected, what happens after the reinstatement?

Collection is recorded with a debit to cash and a credit to accounts receivable.

An allowance for sales return account is classified as a(n)

Contra Account to Accounts Receivable

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following? (Select all that apply.)

Debit Accounts Receivable. Credit Allowance for Uncollectible Accounts.

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000.

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable

Planters Corp. has an account that was written off in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require (Select all that apply.)

Debit accounts receivable; Credit Allowance for Uncollectible Accounts

The balance sheet approach estimates _____ _______ expense by determining the appropriate carrying value of accounts receivable. (Enter one word per blank.)

bad debt

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as

bad debt expense.

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note.

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry?

Adjustment for sales returns that occurred

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the ___________ method of accounting for bad debts.

Allowance

True or false: Long-term notes receivable are accounted for the same way as short-term notes receivable, but the time value of money has a larger effect.

True; The accounting for long-term notes receivable is the same as short-term notes receivable, but the time value of money has a larger effect on long-term notes.

When the amount of bad debts is material, GAAP requires the ______________ method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received. (Enter only one word.)

allowance

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

allowance for uncollectible accounts

To record bad debts at the end of the period, an adjustment would be made by a credit to

allowance for uncollectible accounts.

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

allowance method

On January 1, 2021, Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

as a noncurrent asset

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on December 31, at the end of the year includes a

debit Interest Receivable, $800.

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a

debit to Bad Debt Expense for $2,000.

The income statement approach for estimating bad debts uses a percentage of

net credit sales.

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note receivable.

Failing to estimate sales returns can result in income being _______________ in the period the sale is made and _________________ in the period the product is returned.

overstated; understated

How do sellers typically account for returns? (Select all that apply.)

1. Using an adjusting entry at the end of the period for any remaining future expected returns. 2. As returns occur.

Paredes uses the gross method to record sales on account. Paredes sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include

Accounts Receivable (Dr.) 1,000 Sales (Cr.) 1,000

When a customer returns a product for a refund, in which account is the entry recorded?

Sales return

A company believes its sales returns will be material. What is the journal entry required?

Debit sales returns; credit allowance for sales returns

The formula for calculating interest multiplies which of the following? (Select all that apply.)

Face amount of the note Fraction of the annual period Annual interest rate

True or false: Most sellers estimate returns every time they make a sale.

False, It is impractical for most sellers to estimate returns every time they make a sale so instead, they account for returns as they occur.

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

Which of the following give rise to a note receivable? (Select all that apply.)

Loaning money to stockholders. A formal, written extension of the credit period to trade customers. Loaning money to an affiliated company.

Receivables represent a company's claims to the future collection of (Select all that apply.)

Other Assets Services Cash

What happens when a receivable previously written off is collected in full?

Reinstate the receivable and the allowance for uncollectible accounts.

The gross method and the net method are two ways to record ____________ discounts

Sales discounts

A(n) ____________ _____________ occurs when a customer returns merchandise for a refund

Sales return

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements?

Year 1 net income is overstated

On October 1, Light Corp. sold goods on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. Light has a December 31 year-end and principal and interest are due at maturity. The entry required on Light's books on April 1 when the note is due requires a (Select all that apply.)

credit to note receivable, $100,000 credit to interest receivable, $2,000. credit to interest revenue, $2,000 debit to cash, $104,000

An aging schedule classifies accounts receivable based on

length of time outstanding.