ACC 210 Sawyer Test 2 CH 5

Q : Glasser Corp. provided $20,000 of services on account. The account that should be credited is :

-Service Revenue

net revenues

-a company's total revenues less any discounts, returns, and allowances

uncollectible accounts

-aka "bad debts" -customers' accounts that no longer are considered collectible

percentage-of-receivables method

-aka "balance sheet method" -method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

formally accounts receivable

-amount of cash owed to the company by its customers from the sale of products or services on account

contra revenue account

-an account with a balance that is opposite, or "contra", to that of its related revenue account -ex: sales discounts, sales returns, and sales allowances -recorded during the year - a way to reduce revenue indirectly -must also adjust for these amounts at the end of the year using adjusting entries

average collection period

-approximate number of days the average accounts receivable balance is outstanding -equals 365 divided by the receivables turnover ratio

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 -the older the account the less likely it is to be collected

nontrade receivables

-receivables that originate from sources other than customers -include tax refund claims, interest receivable and loans by the company to other entities

direct write-off method

-recording a bad debt expense at the time we know the account is uncollectible -not allowed for financial reporting under GAAP -primarily used for tax reporting

allowance method

-recording an adjustment at the end of each period to allow for the possibility of future uncollectible accounts. The adjustment has the effects of reducing assets and increasing expenses. -under this method companies are required to estimate future uncollectible accounts and record those estimates in the current year -upside of extending credit to customers is that it boosts sales by allowing customers to purchase on an account and pay later -downside is that not all customers pay fully on their accounts

estimated uncollectible accounts

-reduces assets -increases expenses

sales discount

-reduction in the amount to be paid by a credit customer if payment o account is made within a specified period of time

trade discounts

-reduction in the listed price of a product or service -provide incentives to larger customers to purchase from the company -don't recognize directly

sales allowance

-seller reduces the customer's balance owed or provides partial refund because of some deficiency in the company's product or service

receivables turnover ratio

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

bad debt expense

-the amount of adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period

net realizable value

-the amount the firm expects to collect

credit sales

-transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future -aka "sales/services on account" -firm records revenue when goods are services are received even before cash is received -require payment between 30 to 60 days as indicated by invoice

interest calculation

= face value X Annual interest rate X fraction of the year

TopHat : The journal entry to record bad debt expense and the allowance for doubtful accounts will affect the balance sheet.

TRUE

allowance for uncollectible accounts

-contra asset account representing the amount of accounts receivable that we do not expect to collect

Q : Paredes records sales at the gross amount and uses a sales discount account to account for the the discounts taken by customers. Paredes provides services for $1,000 with terms 2/10, n/30. The entry to record this transaction will include a :

-credit to Service Revenue $1,000

sales return

-customer returns a product a) we reduce the customer's account balance was on account b) we issue a cash refund if the sale was for cash

Q : Zelgon Inc. collected an account previously written off by debiting Accounts Receivable and crediting Allowance for Doubtful Accounts. Zelgon Inc. should also :

-debit cash -and credit accounts receivable

Amend Inc. debited Accounts Receivable and credited Allowance for Doubtful Accounts. Amend Inc. should also debit ____ and credit ___

-debit cash -credit accounts receivable

Q : Kim Corporation sells goods to a customer on account for $1,000, terms 2/10, n/30. When the customer pays on the 20th day, Kim will record which of the following?

-debit cash $1,000 (customer must pay the full amount if paid after 10 days)

Q : Kim Corp. provides services at the gross amount and uses a discount account to account for the discounts taken by customers. Kim provides services on account for $5,000 with terms 2/10, n/30. Recording this transaction will include a :

-debit to Accounts Receivable, $5,000 (the discount account offsets the accounts receivable so the full amount is recorded with an offsetting credit to the sales discount)

Q : Abby Fashions sells a suit to a customer for $600. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby grants the customer a $60 credit. Abby will record :

-debit to Sales Allowance $60

Q : Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15?

-debit to Sales Returns -credit to Accounts Receivable

Q : York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows:

-equity decreases -assets decrease

asset

-legal right to receive cash -i.e. accounts receivable, recorded in the balance sheet -receivables not expected to be collected should not be counted as assets

Q : The financial statement effects of recording an allowance for estimated sales returns are that :

-net income decreases -equity decreases -assets decrease

writing off account receivable

-no effect on total amounts reported in the balance sheet of the income statement -no decrease in total assets or net income because we have already recorded the bad news

collecting on a previously written off account

-no effect on total assets and no effect on net income

notes receivable

-when receivables are accompanied by formal credit arrangements made with written debt instruments -typically arise from loans to other entities, loans to stockholders and employees, and occasionally the sale of merchandise or other assets -classify as current or noncurrent

Important Points to understand adjusting entries to record these estimated contra revenues at the end of the year on the Income Statement

1 revenues are reported for the amount of cash a company expects to be entitled to receive from customers for providing goods and services 2 total revenues are reduced by sales discounts, sales returns, and sales allowances that occur during the year 3 total revenues are further reduced by an adjusting entry at the end of the year for the estimate of additional sales discounts, sales returns, and sales allowances expected to occur in the future but that relate to the current year

discount terms

2/10 - customer will receive 2% discount if the amount owed is paid within 10 days n/30 - "net thirty", if the customer does NOT take the discount within 10 days, full payment net of any returns or allowances is due within 30 days