ACC 2301 - CH 8 - SB

The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.

write-off of a specific customer's account

If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of ______.

$1,000 Debit

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

Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.

- 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

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 ______. (Select all that apply.)

- Allowance for Doubtful Accounts of $1,000 - Bad Debt Expense of $950

Rank companies A-C based on how favorable their receivables turnover ratio is (from most favorable on the top to the least favorable). (Assume the companies have similar credit terms.)

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

Which of the following are disadvantages to extending credit to customers? (Check all that apply.)

- Delayed receipts of cash - Increased bad debt costs - Increased wage costs

Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings? (Check all that apply.)

- Depreciation Expense - Sales Revenue - Bad Debt Expense

Which of the following are advantages of using national credit cards? (Check all that apply.)

- avoid lengthy cash collection periods - reduction of bad debts expense

Net sales revenue is $730,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the days to collect.

30 Days

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

Which of the following is a permanent account whereby the ending balance of the prior accounting period equals its beginning balance of the next.

Allowance for Doubtful Accounts

Which of the following is contra-asset account?

Allowance for Doubtful Accounts

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, the ______.

Allowance for Doubtful Accounts will have a $90,000 credit balance

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.

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 adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to _________ . (Enter only one word per blank.)

Blank 1: Allowance Blank 2: for Blank 3: Doubtful Blank 4: Accounts

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 that reduce profits.

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

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

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.

Why would a company debit Interest Receivable?

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

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

It is collecting the principal on amounts lent earlier.

Match the following methods for estimating bad debts with their descriptions.

Percentage = Estimates... losses Aging = Estimates... 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.

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

The receipt of an interest payment for interest previously recorded

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

Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when ______.

a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable

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

a write-off

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

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

an asset called Notes Receivable

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

Which company has the higher receivables turnover ratio? Company A: Average Net Accounts Receivable: 2,000 Average Inventory: 4,000 Net Sales: 40,000 Company B: Average Net Accounts Receivable: 5,000 Average Inventory: 20,000 Net Sales: 100,000

both are the same

A ___ stuffing scenario refers to when a company increases its credit sales by selling to less financially secure customers. (Enter one word per blank.)

channel

A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest ______.

channel stuffing

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

If a company writes off a specific customer's account with a debit to Bad Debt Expense and credit to Accounts Receivable, it must be using the ______ method.

direct write-off

A high receivables turnover ratio is a sign of a company's ______.

effectiveness in granting and collecting credit

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, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

greater than

The receivables turnover ratio gives information on how ______.

many times the company sells and collects amounts on account per year

The receivables turnover ratio is computed as ______.

net sales revenue divided by average net accounts receivable

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

the establishment of a note

The journal entry for the direct write-off method includes a ______. (Check all that apply.)

- credit to Accounts Receivable - debit to Bad Debt Expense

The journal entry to record $5.6 million in sales on account includes a ______. (Select all that apply.)

- credit to Sales Revenue of $5.6 million - debit to Accounts Receivable of $5.6 million

Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. (Check all that apply.)

- debit to Bad Debt Expense of $900 - credit to Allowance for Doubtful Accounts of $900

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 ______. (Check all that apply.)

- debit to Notes Receivable of $1,000 - credit to Cash of $1,000

Sales on account ______. (Check all that apply.)

- increase assets and stockholders' equity - increase Accounts Receivable on the balance sheet and Sales Revenue on the income statement

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______. (Check all that apply.)

- sales to decrease - bad debt expense to decrease

The adjusting entry to record the allowance for doubtful accounts causes total ______. (Check all that apply.)

- stockholders' equity to decrease - assets to decrease

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ______. (Select all that apply.)

- the company would lose track of which customers still owe money - the amounts are estimates and no one knows which particular customers will not pay

Notes receivable are used for ______. (Check all that apply.)

- selling large dollar-value items - lending money to individuals or businesses - extending payment periods