Principles of Accounting Ch 5

What is a sales discount?

Reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time.

What does accounts receivable represent?

The amounts owed to the company by its customers from the sale of goods or services on account/ who have not yet paid

Receivables not expected to be collected should...?

not be counted in assets of the company.

What are two important ratios that help in understanding a company's effectiveness in managing receivables?

receivables turnover ratio and average collection period

How would a credit sale be recorded?

with a debit to accounts receivable and a credit to service revenue

Schmidt Company's Accounts Receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. What is the net amount of accounts receivable?

$100,000-$4,000=$96,000

On April 1, 20X1, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are due on March 31, 20X2 (one year later). On December 31, 20X1, what will Nelsen accrue in interest revenue?

$100,000x0.08 = $8,000/12 = $666.67x9 = $6,000

At the end of its first year of operations, a company establishes an allowance for future uncollectible accounts for $5,600. At what amount would bad debt expense be reported in the current year's income statement?

$5600

Allowance for Uncollectible Accounts has a credit balance because it is what kind of account?

A contra-asset account

Using the allowance method, the entry to record a write-off of accounts receivable will include what?

A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable

What is the allowance for uncollectible accounts?

Contra asset account representing the amount of accounts receivable not expected to be collected.

What is the formula for interest on a note?

Face value x annual interest rate x fraction of the annual period

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False

What is the percentage of receivables method?

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

What is the allowance method?

Method of reporting accounts receivable for the net amount expected to be collected. At the end of every period, the company will estimate the number of bad debts and record them as an expense.

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

Sales Return

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to what?

allowance for uncollectible accounts

When is bad debt expense recorded in the allowance method?

at the end of the period when bad debts are estimated

When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?

credit Allowance for Uncollectible Accounts and debit Accounts Receivable

The Accounts Receivable account is reduced when the seller determines what?

determines that a specific customer account will not be collectible

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) ________ ________ approach to measuring bad debts.

income statement

What is the direct write-off method required for?

income tax purposes

What does a credit balance before adjustment indicate?

that the balance of the allowance account at the beginning of the year was too high

What does a debit balance before adjustment indicate?

that the balance of the allowance account at the beginning of the year was too low

A company that expects that some of its customers will not pay the agreed upon sales price must utilize what method?

the allowance method

Why is the direct write off method generally not permitted for financial reporting?

the direct write off method causes assets to be overstated and operating expenses to be understated

Why are accounts receivable typically classified as current assets?

they will be converted to cash within 1 year.

What is the purpose of keeping a contra revenue account?

to keep a record of the total revenue recognized separate from the reduction due to subsequent sales returns

What does the allowance method estimate?

uncollectible accounts

What is a sales return?

when a customer returns a product

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What amount would Fox record as revenue on March 17?

$12,000

On March 17, Fox Lumber sells materials to Whitney Construction for $12,000, terms 2/10, n/30. Whitney pays for the materials on March 23. What is the amount of net revenues (sales minus sales discounts) as of March 23?

$12,000x0.98=$11,760

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

$18,000

On August 4, Sanders provides services to Frederickson for $5,000, terms 3/10, n/30. Frederickson pays for the services on August 12. What is the amount of net revenues (total revenue minus sales discounts) as of August 12?

$5,000x0.97=$4850

On August 4, Sanders provides services to Frederickson for $5,000, terms 3/10, n/30. Frederickson pays for the services on August 12. What amount would Sanders record as revenue on August 4?

$5000

A company has the following account balances at the end of the year: Credit Sales = $400,000 Accounts receivable = $80,000 Allowance for Uncollectible Accounts = $400 debit The company estimates future uncollectible accounts to be 4% of accounts receivable. At what amount would Bad Debt Expense be reported in the current year's income statement?

($80,000x0.04)+$400=$3,600

A company has the following account balances at the end of the year: Credit Sales = $400,000 Accounts receivable = $80,000 Allowance for Uncollectible Accounts = $400 credit The company estimates future uncollectible accounts to be 4% of accounts receivable. At what amount would Bad Debt Expense be reported in the current year's income statement?

($80,000x0.04)-$400=$2,800

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a debit of $500 and that the company estimates 7% of the accounts receivable will not be collected. What will be the amount of bad debt expense recorded on December 31?

($80,000x0.07)+$500=$6,100

What are four types of contra revenue accounts?

- trade discounts - sales returns - sales allowances - sales discounts

What is the amount of cash owed to the company by its customers from the sale of products or services on account known as?

Accounts Receivable

When a company provides services on account, which of the following accounts is debited?

Accounts Receivable.

Why is the direct write-off method generally not permitted for financial reporting purposes?

Accounts receivable are not stated for the amount of cash expected to be collected.

What is a contra revenue account?

An account with a balance that is opposite, or "contra," to that of its related revenue account

What is an invoice?

An invoice is a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms.

Accounts receivable are best described as what?

Assets of the company representing the amount owed by customers.

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

Average Collection Period= 365 days/receivables turnover ratio. 365/9=40.6

What is the aging method?

Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts

What is the direct write off method?

Recording bad debt expense at the time we know the account is actually uncollectible

What are credit sales?

Credit sales are the transfer of goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

A company provides services to a customer in the current year and then determines in the following year that the customer's account needs to be classified as uncollectible. If the company uses the direct write-off method, which of the following would be recorded in the following year at the time of the write-off?

Debit Bad Debt Expense and Credit Accounts Receivable

A company has the following aging schedule of its accounts receivable with the estimated percent uncollectible: Age Group Amount Receivable Estimated Percent Uncollectible Not yet due. $175,000. 4% 0 to 60 days past due $40,000 10% 61 to 120 days past due $10,000 30% >120 days past due $5,000 60% Assuming the balance of Allowance for Uncollectible Accounts is $3,000 (credit) before adjustment, what would be recorded in the year-end adjusting entry?

Debit Bad Debt Expense for $14,000 and Credit Allowance for Uncollectible Accounts for $14,000 (0.04x$175,000)+(0.1x$40,000)+(0.3x$10,000)+(0.6x$5,000)=$14,000

On January 18, a company provides services to a customer for $500 and offers the customer terms 2/10, n/30. Which of the following would be recorded when the customer remits payment on January 25? Credit Accounts Receivable for $490. Debit Sales Discount for $10. Debit Cash for $500. Credit Service Revenue for $500.

Debit Sales Discount for $10.

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

When is the direct write off method used?

It is only used in financial reporting if uncollectible accounts are not anticipated or are expected to be very small

What is the primary use of the direct write off method?

It is primarily used for tax reporting

The account "Allowance for Uncollectible Accounts" normally has what kind of balance? A credit or debit balance?

It normally has a credit balance

If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account:

Net accounts receivable do not change.

What are net revenues?

Net revenues are a company's total revenues less any discounts, returns, and allowances.

What is the receivables turnover ratio a measure of? What is the equation?

The number of times during a year that the average accounts receivable balance is collected. It equals net credit sales divided by average accounts receivable

If a company uses the allowance method of accounting for uncollectible accounts and collects cash on an account receivable previously written off:

There is no change in total assets

What is the purpose of a sales discount?

To provide incentive to the customer for quick payment

What is net revenue?

Total revenues less discounts, returns, and allowances

Under the allowance method for uncollectible accounts, when does the balance of Allowance for Uncollectible Accounts increase?

When future bad debts are estimated

The percentage-of-receivables approach to measuring bad debt expense is referred to as what kind of method?

a balance sheet method

What do the receivables turnover ratio and the average collection period provide information about?

a company's effectiveness in managing receivables

What is the account "Allowance for Uncollectible Accounts" classified as?

a contra asset to accounts receivable

What is a sales discount recorded by the seller?

a contra revenue

Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include what entries?

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

At the end of its first year of operations, a company estimates future uncollectible accounts to be $4,500. What would the company's year-end adjusting entry include?

a debit to bad debt expense and a credit to Allowance for Uncollectible Accounts for $4,500.

What does the journal entry to record bad debt expense include?

a debit to bad debt expense and a credit to allowance for uncollectible accounts

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require what?

a debit to cash and a credit to Allowance for Uncollectible Accounts

What does the income statement approach for estimating bad debts use?

a percentage of credit sales

The effect of writing off a specific account receivable is: a) A reduction in the Allowance for Uncollectible Accounts. b) An increase in the amount of Accounts Receivable. c) An increase in the amount of Bad Debt Expense. d) An increase in the Allowance for Uncollectible Accounts.

a)

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.) a) credit sales. b) nonaccrued sales. c) sales on account. d) deferred sales.

a) and c)

What is an informal credit arrangement with a customer for payment to be received after the sale classified as?

account receivable

Writing off a customer's account as uncollectible reduces which balance?

accounts receivable

What is net accounts receivable?

accounts receivable minus allowance for doubtful accounts

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

The cost of estimated accounts receivable that will not be collected is referred to as what?

bad debt expense

What is the estimated expense for accounts that may not be collected?

bad debt expense

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to...

be more accurate

Which of the following transactions would result in an account receivable? a) Paying for supplies previously purchased on account. b) Receiving a loan from the bank. c) Providing services to customers on account. d) Purchasing supplies on account.

c)

What is accounts receivable classified as?

current asset

What is the income statement approach for estimating bad debts focused on?

current year's credit sales

Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include what?

debit Allowance for Uncollectible Accounts and credit accounts receivable

Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit what and credit what?

debit cash and credit accounts receivable

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

Suppose the balance of the allowance for uncollectible accounts at the end of the current year is $800 (credit) before any adjusting entry. The company estimates future uncollectible accounts to be $5,600. At what amount would bad debt expense be reported in the current year's income statement?

$5,600-$800=$4,800

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000

At the beginning of the year, Clay Ventures has total accounts receivable of $100,000. By the end of the year, Clay reports net credit sales of $900,000 and total accounts receivable of $200,000. What is the average collection period for Clay Ventures?

(100,000+200,000)/2 = 300,000/2 = 150,000/900,000x365 = 60.8 days

A trade discount is a reduction from the list price, which is used to do what three things?

- to change prices without publishing a new catalog - to give quantity discounts to customers - to disguise real prices from competitors

What are four types of transactions that would reduce the amount of cash a company is entitled to?

- trade discounts - sales returns - sales allowances - sales discounts

What are trade discounts?

-reductions from the list price -not recognized in the accounting records -customers are billed net of discounts

What does the entry to record the estimate for uncollectible accounts include?

A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts

What is notes receivable?

A formal credit arrangement between a creditor and debtor

What is a subsidiary ledger?

A group of individual accounts associated with a particular general ledger control account

What is bad debt expense?

The cost of estimated future bad debts that is reported as an expense in the current year's income statement.

What is a partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations

a sales allowance

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, how will the write off affect the net income?

it will have no effect because Pixie Inc. has already accounted for bad debts

When the allowance method is used, what effect will the write-off of an uncollectible account have on net income?

it will have no effect on net income

What two entries are required when a previously written-off account is collected?

reinstate the account receivable and record the collection on the account receivable

When are revenues recorded in credit sales?

revenues are recorded immediately once goods and services are provided to the customer

On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a credit of $500 and that the company estimates 7% of the accounts receivable will not be collected. What will be the amount of bad debt expense recorded on December 31?

($80,000x0.07)-$500=$5,100

Nija Incorporated reports the following aging schedule of its accounts receivable with the estimated percent uncollectible. What is the total estimate of uncollectible accounts using the aging method? Age Group. Amount Receivable Estimated Percent Uncollectible 0 to 60 days $40,000 1% 61 to 90 days 15,000 20%. >90 days past due 5,000 60% Total $60,000

(0.01x$40,000)+(0.2x$15,000)+(0.6x$5,000)=$6,400

Kidz Incorporated reports the following aging schedule of its accounts receivable with the estimated percent uncollectible. Age Group Amount Receivable Estimated Percent Uncollectible 0 to 60 days $20,000 2% 61 to 90 days $6,000 15% >90 days past due $2,000 50% Total $28,000 At what amount would Allowance for Uncollectible Accounts be reported in the current year's balance sheet?

(0.02x$20,000)+(0.15x$6,000)+(0.5x$2,000)=$2,300

What is a sales allowance?

when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service, ie damaged merchandise. Ex. sales allowance (debit) & accounts receivable (credit)