ACCT 101- CHAPTER 5

On September 1, Year 1, Dallas Corporation accepts a $30,000 six-month, 12 percent promissory note from one of its clients. The year-end adjustment to accrue interest revenue on December 31, Year 1 will include a

$1,200 credit to Interest Revenue ( Interest Receivable will be debited and Interest Revenue will be credited. ($1,200 = $30,000 × 12% x [4/12])

On January 1, Year 1, Alpha Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?

$225 ( Interest revenue = $10,000 x 9% × [3/12] = $225. )

During its first year of operations, Ellison, Inc. bills customers $18,000 for the services it provided. At the end of the year, $6,000 remains due from customers. The company's credit manager estimates that 10% of the total year-end accounts receivable will not be collected. The company's estimate of uncollectible accounts is:

$600 ( $6,000 × 10% = $600.)

Net credit sales for Turner Company are $200,000 for the year and the average accounts receivable balance is $20,000. What is the company's average collection period? (Use 365 days in a year.)

36.5 days ( Average collection period = 365 ÷ 10 = 36.5 days.)

Net credit sales for Winner Company are $100,000 for the year. The Accounts Receivable account had a balance of $15,000 at the beginning of the year and $25,000 at the end of the year. What is the company's receivables turnover ratio?

5.0 ( Receivables turnover ratio = $100,000 ÷ [($15,000 + $25,000)/2] = $100,000 ÷ $20,000 = 5.

A company will debit ___________ when recording a credit sale.

Accounts Receivable

Beta Corporation wrote off $100,000 due from a specific client in March. However, this client was able to make a partial payment of $15,000 in June. Recording this cash collection will involve all of the following accounts except:

Bad Debt Expense

Account(s) with a normal credit balance include:

Bad Debt Expense Cash Sale Revenues

How are trade discounts recognized?

By recording the sale at a discounted price

A company makes a credit sale for $500. Future collection from the customer is probable. The company will not record revenue from the transaction until it collects cash from the customer.

FALSE

A company's decision to offer discounts for early payment has the potential to increase sales volume, but comes at the cost of slower cash collection.

FALSE

Collecting cash on an account previously written off increases total assets but has no effect on net income.

FALSE

Company A and Company B operate in the same industry and region. Compared to Company B, Company A has a low receivables turnover ratio and a correspondingly high average collection period. From this information, we can conclude that Company A is managing its receivables better than Company B.

FALSE ( Think of the time it takes for Company A to collect its receivables. )

Delta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Delta required the customer to sign a six-month, 11 percent promissory note on February 1, Year 2. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

No impact on the accounting equation

A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:

Sales Discounts for $24

At the end of Year 1, Fulton Corporation estimates uncollectible accounts to be $10,000. Actual bad debts during Year 2 totaled $12,000. This indicates that management's estimate of uncollectible accounts in Year 1 was:

TOO LOW

A debit balance in the Allowance for Uncollectible Accounts before year-end adjustment indicates that the company wrote off more bad debts in the current year than it had estimated.

TRUE

Credit sales involve benefits and costs. A benefit of selling on credit is that the seller makes it more convenient for customers to purchase goods and services. A cost of selling on credit is that there is a delay in collecting cash from customers.

TRUE

The allowance method is required by GAAP for financial reporting purposes.

TRUE

The allowance method requires managers to estimate future uncollectible accounts and to record that estimate in the current year.

TRUE

The balances in sales returns, allowances, and discounts are subtracted from total revenues when calculating net revenues.

TRUE

The percentage-of-receivables method is sometimes referred to as the balance sheet method, because we base the estimate of bad debts on an amount found in the balance sheet.

TRUE

Writing off actual bad debts and reestablishing those previous write-offs when it appears that customers will pay has no effect on net accounts receivable.

TRUE

The percentage increase in receivables for Petro Corporation is greater than the percentage increase in sales. Which of the following conclusions can be drawn from this information?

The average collection period will increase

Trade discounts represent:

a reduction in the listed price of a good or service.

Sales Returns is an example of a(n) ____________ account, which is used to keep a record of reductions from revenue due to sales returns separate from total revenue itself.

contra revenue

According to the allowance method, writing off an account receivable will include a:

credit to Accounts Receivable

On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a:

credit to Accounts Receivable

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 24. The receipt of payment will include a:

credit to Accounts Receivable for $1,000

During its first year of operations, Kimbrough Corporation sold $14 million worth of goods on account. At the end of the year, $5 million remains due from customers. If the company estimates that 20% of the total year-end accounts receivable will not be collected, it will record a:

credit to Allowance for Uncollectible Accounts for $1 million

On September 1, Year 1, a company collects a $5,000 six-month, five percent promissory note. The entry to record the collection at maturity date will include a:

credit to Interest Revenue for $125 ( The entry will include a debit to Cash for $5,125, a credit to Notes Receivable for $5,000, and a credit to Interest Revenue for $125 ($5,000 × 5% × [6/12]).

On September 1, Year 1, Sigma Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, Year 2, the maturity date, will involve all of the following except a

credit to Interest Revenue for $4,500 ( The entry will include a debit to Cash for $104,500, a credit to Notes Receivable for $100,000, a credit to Interest Receivable for $3,000 ($100,000 × 9% × [4/12]), and a credit to Interest Revenue for $1,500 ($100,000 × 9% × [2/12]).

Using the aging method, Carlton Company calculates the estimated ending balance in the Allowance for Uncollectible Accounts to be $12,000. Prior to adjusting entries, the Allowance for Uncollectible Accounts has a credit balance of $3,000. The year-end adjustment would include a:

debit to Bad Debt Expense for $9,000 ( $12,000-$3,000)

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 6. The receipt of payment will include a:

debit to Cash for $980

On January 1, Year 1, Boyd Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. To record acceptance of the note, the company will record a:

debit to Notes Receivable for $10,000

On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:

debit to Sales Returns

Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts:

decrease total assets and decrease net income.

Under the allowance method, the write-off of accounts receivable:

has no effect on total assets or net income.