ACCT: Chapter 9 Smartbook

On August 21, Alix Company receives a $2,000, 60-day, 6% note from a customer as payment on her account. How much interest will be due on October 20, the due date?

$20 $2,000 x 6% x 60/360

Yates Co. uses the allowance method to account for bad debts. At the end of the period, Yate's unadjusted trial balance shows an accounts receivable balance of $10,000; allowance for doubtful accounts balance of $400 (credit); and sales of $500,000. Based on history, Yates estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of:

$5,000 Since this is based on a percentage of sales, you should simply multiply $500,000 x .01 = $5,000. For percentage of sales method, you do not adjust for a previous balance in the allowance account.

On June 30, Nance Company receives a $5,000, 90-day, 4% note from a customer as payment on her account. How much interest will be due on the note's maturity date?

$50 $5,000 x 4% x 90/360

Flash Co. uses the allowance method to account for bad debts. At the end of the year, Flash Co.'s unadjusted trial balance shows an accounts receivable balance of $45,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,500,000. Based on history, Flash estimates that bad debts will be 0.5% of sales. The entry to record estimated bad debts will include an debit to Bad Debts Expense in the amount of:

$7,500 When allowance method is based on sales, do not take into account previous balance in the allowance account. $1,500,000x.005=$7,500.

he following financial information is available for Siu Co. Title 20x1 20x0 Net Sales 160,000 155,000 Accounts Receivable 38,000 32,000 Compute accounts receivable turnover for 20x1. Round your answer to one decimal place.

4.6 160,000/ ((38,000+32,000)/2) = 4.57 rounds to 4.6

On March 14, Zest Co. accepted a 120-day, 6% note in the amount of $5,000 from AZC Co., a customer. On the due date of the note, AZC dishonors the note and fails to pay. The journal entry that Zest would make to record the failure to pay this note on the due date would include a debit to:

Accounts Receivable - AZC for $5,100 Reason: Interest = $5,000 x .06 x (120/360) = $100.

Simon Co. sold $500 of merchandise on their own store credit cards. The entry to record this sales transaction on the date of the sale would include a debit to:

Accounts Receivable for $500

A company has $150,000 of credit sales during the year and estimates that $1,000 of its accounts receivable will be uncollectible. The adjusting entry will include a credit to:

Allowance for Doubtful Accounts

At year-end, Avis Company estimates that $2,000 of its accounts receivable balance is uncollectible. Avis uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a credit to:

Allowance for Doubtful Accounts

Avia Company determines that a customer balance of $400 from Allia, Inc. is uncollectible. Avia uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a debit to:

Allowance for Doubtful Accounts

Notes receivable

An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates

A 60-day note is signed on February 15 (and it's not leap year). The due date of the note is:

April 16 February 28th - February 15th = 13 days + 31 days for March = 44 days; 60 total days - 44 days = 16; therefore, April 16.

If an account receivable balance previously written off using the direct write-off method is later collected in full, the entry to record the payment must include a credit to:

Bad Debts Expense Reason: Two entries are required: one to reinstate the account by debiting accounts receivable and crediting bad debts expense. The second entry is to debit cash and credit accounts receivable.

Thomas Co. sold $1,000 worth of merchandise on a bank credit card with a 3% fee. The entry to record the sales transaction would include a debit to Cash in the amount of $___

Blank 1: 970

(Bad/Invalid) ___ (collectible/debts) ___ are accounts of customers who do not pay what they have promised to pay. It's considered an expense of selling on credit.

Blank 1: Bad Blank 2: Debts

A company sells merchandise to a customer on credit. The journal entry that the company makes to record this sale would include a (debit/credit) ___ to the sales account.

Blank 1: credit

Tunes Company determines that a customer balance of $250 from Able Co. is uncollectible. Tunes uses the allowance method to account for bad debts. The entry to write off Able's uncollectible balance will include a (debit/credit) ___ to the Allowance for Doubtful Accounts.

Blank 1: debit

The direct write-off method records bad debts expense only when an account becomes uncollectible, which is not always in the same period as the sale. For this reason, the direct write-off method violates the ___ ___ principle

Blank 1: expense or matching Blank 2: recognition

Companies sometimes convert receivables to cash before they are due. When a company sells its receivables, the buyer is called a ___ (pledgor/factor). When a company uses receivables as security for a loan, it is called ___ (pledging/factoring).

Blank 1: factor Blank 2: pledging or pledge

The principal and interest of a note are due on its maturity date. If the maker of the note pays the note in full, the maker is said to have (honored/dishonored) ___ the note.

Blank 1: honored, honor, or honors

T. Hillcrest Co. sold $500 of merchandise on a bank credit card with a 5% fee. The entry to record this sales transaction would include debit(s) to:

Cash for $475 and to Credit Card Expense for $25

Tricon Co. sells $10,000 of its accounts receivables and is charged a 5% factoring fee. It records this sale with a debit to:

Cash for $9,500. Cash is debited for $9,500. $10,000 x .05=$500. $10,000-500=$9,500. Accounts receivable will be credited for $10,000.

Iron Company collects cash in full from a customer who purchased merchandise last month on credit. To record the receipt of cash, Iron Company should make the following entries in the general journal. (Check all that apply.)

Credit to Accounts Receivable Debit to Cash

The direct write-off method of accounting for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.

False

When the maker of a note pays at maturity, the note is said to be dishonored.

False Reason: When the maker of a note pays at maturity, the note is said to be honored.

Kaiven Company accepted a $12,000, 60-day, 6% note on December 21 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 would include a debit to:

Interest Receivable for $20.

On November 1, Alice Co. accepted a 90-day, 6%, $2,000 note due January 30. On December 31, the appropriate adjusting entry was made. On January 30 of the next year, the note was honored and paid in full. The entry to record receipt of payment on January 30 would include a credit to:

Interest Revenue for $10. Interest Receivable for $20. Notes Receivable for $2,000 On 12/31, a journal entry was made to debit Interest Receivable and credit Interest Revenue for $20 ($2,000 x 6% x 60/360).

On March 14, Teal Co. accepted a 120-day, 6% note in the amount of $10,000 from AZC Co., a customer. On the due date of the note, AZC honors the note and pays in full. The journal entry that Teal would make to record payment of this note would include a credit to:

Interest Revenue for $200.

On December 1, Christy Co. accepted a 60-day, 6%, $1,000 note due January 30. On December 31, the appropriate year-end adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 (assuming no reversing entry was made) would include a credit to:

Interest Revenue for $5. Interest Receivable for $5. Notes Receivable for $1,000.

A 90-day note is signed on October 21. The due date of the note is:

January 19 90 days = 31-21=10 days in October + 30 days in November + 31 days in December + 19 days in January. Always start with the number of days in the first month and subtract the date of the note. (October: 31-21 = 10).

DonCo, Inc. sold merchandise on January 14, and accepted a 90-day, 5% promissory note in the amount of $5,000. On January 14, the entry to record this transaction would include a debit to:

Notes Receivable in the amount of $5,000

Maker

One who signed the note and promised to pay at maturity

Payee

The person to whom the note is payable

To compute interest due on a maturity date, you should multiply which of the following factors?

Time expressed in fraction of year Principal Interest rate

A note is honored when it is paid in full.

True

Promissory note

Written promise to pay a specified amount of money

______ is a supplementary record created to maintain a separate account for each customer.

accounts receivable ledger

The ________ is a measure of both the quality and liquidity of accounts receivable; it indicates how often, on average, receivables are received and collected during the period.

accounts receivable turnover

The ______ method, also referred to as balance sheet method, uses balance sheet relations to estimate bad debts—mainly, the relationship between accounts receivable and the allowance account.

aging of accounts receivable

The __ method of estimating bad debts uses both past and current receivables information to estimate the allowance amount. Specifically, each receivable is classified by how long it is past its due date.

aging of receivables

Bad debts are: (Check all that apply.)

an expense of selling on credit. also called uncollectible accounts. accounts of customers who do not pay.

Companies allow customers to pay for products using third-party credit cards because:

cash is received from the credit card company faster than from a credit customer. the seller avoids the risk of customer non-payment. a variety of payment options typically increase sales volume. the seller does not have to evaluate customer credit.

On July 10, Yao Co. collects $740 from Ean, Inc. from a prior credit sale. This entry would be recorded by Yao with a: (Check all that apply.)

credit to Accounts Receivable. debit to Cash.

P. Jameson Co. sold $500 of merchandise on Master Card credit sales. The net cash receipts from the sale are immediately deposited in the seller's bank account. Master Card charges a 4% fee. The journal entry to record this sales transaction would include a:

debit to Credit Card Expense for $20. debit to Cash for $480. credit to Sales for $500.

The direct write-off method records bad debts expense only when a specific account becomes uncollectible, which is not always in the same period as the sale. For this reason, the direct write-off method violates the

expense recognition

______ constraint is permitted under GAAP when its results approximate those under the allowance method.

materiality

Accounts receivable turnover is calculated using the following formula:

net sales/average accounts receivable, net

The ______ method of estimating allowance for doubtful accounts is based on the idea that a given percent of a company's credit sales for the period are uncollectible.

percentage of sales

When a company's receivables are used as security for a loan, the company is said to have

pledged

When an account previously written off is later collected, two journal entries are required. The first journal entry is to Blank______ the account, and the second journal entry is to record Blank______ of payment.

reinstate, receipt

The allowance for doubtful accounts is a contra asset account that equals:

total uncollectible accounts

Interest

Charge from using money loaned from one entity to another

Lion Company accepted a $15,000, 30-day, 6% note on December 16 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 for Lion Company would include a credit to:

Interest Revenue for $37.50. The adjusting entry for Lion Company is to credit interest revenue for $37.50 [$15,000 x .06 x (15/360)]. Interest receivable would be debited.

The two methods companies can use to convert receivables to cash before they are due includes selling them and pledging them.

True The two methods companies can use to convert receivables to cash before they are due includes selling them and using them as security for a loan, called pledging.

On January 1, Franz Co. accepted a 30-day, 6% note in the amount of $5,000 from Bria Co., a customer. On January 31, the due date of the note, Bria honors the note and pays in full. The journal entry that Franz would make to record payment of this note would include a:

credit to Interest Revenue for $25. credit to Note Receivable for $5,000. debit to Cash for $5,025.

Lani Co. uses the allowance method to account for bad debts. At the end of the year, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

$4,400 $400,000 x 1% = 4,000 + 400 debit balance = $4,400

Receivable

Amount due from another party

Principal

Amount that the signer agrees to pay back, not including interest

Accounts receivable

Amounts due from customers for credit sales

On August 1, Hanes Co. determines that it cannot collect $150 from a customer. Hanes uses the direct write-off method. Hanes will record the write-off of this account by debiting:

Bad Debts Expense for $150. Reason: Under the direct write-off method, the debit will be to the bad debts expense account. Cash is not collected.

Net sales for a company are $250,000. Average accounts receivable are $10,000. The accounts receivable turnover for this company is ___

Blank 1: 25 Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable $250000/10000 = 25 times

In August, Johns Co.'s account receivable balance was written off using the direct method. In November, Johns pays the balance in full. The journal entry to record the reinstatement of the account receivable must include a credit to the ___ ___ ___ account before recording a debit to the Cash account.

Blank 1: Bad Blank 2: Debts or debt Blank 3: Expense or expenses

The two most common receivables are ___ receivables and ___ receivables.

Blank 1: accounts or account Blank 2: notes or note

The (aging/percent) ___ of accounts receivable method uses several percentages, based on how long an account is past due, to estimate the allowance.

Blank 1: aging

The allowance for doubtful accounts is a(n) (current/contra/opposite) ___ asset account and has a normal credit balance.

Blank 1: contra

A company estimates that $1,000 of its accounts receivable is uncollectible at the end of the period and will make the following adjusting entry:

Credit to Allowance for Doubtful Accounts Debit to Bad Debts Expense for $1,000

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts.

True The allowance method estimates bad debt expense before an uncollectible account receivable has been determined to be uncollectible. The direct write-off method writes off accounts as they are determined to be uncollectible.

A. Stine Co. previously wrote off a $200 bad debt from Thorn Co. using the direct write-off method. On October 1, Stine unexpectedly receives a check in the amount of $200 from Thorn Co. The entry to record this receipt of $200 will include a: (Check all that apply.)

credit to Bad Debts Expense. debit to Cash The account was previously written off, so it now needs to be reinstated by crediting Bad Debts Expense. Cash will be debited to increase it.

On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 overdue account. Eli's journal entry to record this transaction on November 1, would include a:

debit to Notes Receivable for $6,000. credit to Accounts Receivable for $6,000.

The __ method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense.

direct write-off

An accounts receivable ledger: (Check all that apply.)

is a supplementary record to maintain an account for each customer. records journal entries that affect accounts receivable.

To compute interest due on a maturity date, use the formula:

principal x interest rate x time expressed in fraction of year

The expected proceeds from accounts receivable, determined by taking accounts receivable less the allowance for doubtful accounts, is called:

realizable value

Dea Company sold $1,000 of merchandise to a customer who used Dea Company's credit card. The entry to record this transaction on the date of the sale would include:

Accounts Receivable in the amount of $1,000. Sales in the amount of $1,000.

The (allowance/direct write-off) ___ method of accounting for bad debts records estimated bad debts expense in the period when the related sales are recorded.

Blank 1: allowance

When a note's maker does not pay at maturity, the note is considered (honored/dishonored) ___

Blank 1: dishonored

Avi Co. raises cash by borrowing $10,000 and pledging $12,000 accounts receivables as security for the loan. Avi will record a journal entry in the amount of the $10,000 note payable, and also record a (debit/credit/footnote) ___ to the financial statements, indicating that $12,000 of accounts receivables have been pledged.

Blank 1: footnote or footnotes

The (maker/payee) ___ of the note is the one that signed the note and promised to pay at maturity. The (maker/payee) ___ of the note is the person to whom the note is payable.

Blank 1: maker Blank 2: payee

The ___ constraint is permitted under GAAP when the results approximate those using the allowance method.

Blank 1: materiality

On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to:

Accounts Receivable for $3,025 Interest = $3,000x.05x(60/360)=$25. The note is dishonored so they did not receive cash. Accounts receivable is debited for $3,025.

On August 1, Harris Co. determines that it cannot collect $200 from its customer, L. Dash. Harris Co. uses the direct write-off method, so they will record the write-off of this account by debiting:

Bad Debt Expense. Accounts receivable would be credited under the Allowance method. This question asks for the debit entry.

Acel Co. uses the allowance method to account for bad debts. In January, Acel determined that it could not collect $400 from CTR, Inc. and wrote the balance off. On October 21, Acel received a check for $400 from CTR. The entries to record the receipt of cash on October 21 would include a debit to: (Check all that apply.)

Cash. Accounts Receivable.

Zion Company sells merchandise on credit to BRC, Inc. in the amount of $1,200. The entry to record this sale would include a: (Check all that apply.)

credit to Sales. debit to Accounts Receivable.

Leo Co. uses the allowance method to account for bad debts. At the end of the year, Leo Co.'s accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (credit); and sales of $500,000. Based on history, Leo estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

$400 $25,000 x 2% = $500 desired ending balance in the allowance account. Subtract the beginning credit balance to determine the amount of the adjusting entry. $500 - $100 = $400.

Conroy Company uses the allowance method to account for bad debts. During the year, Conroy determined that a balance of $200 from Alegia Co. was uncollectible and wrote the balance off. What is the total decrease to net income related to this entry?

$0 The decrease in net income occurs when bad debts is estimated (allowance account is increased). This entry reduces accounts receivable using the allowance account.

Maturity date

Day that the principal and interest must be paid

On December 31, DVS Company estimates that $2,500 of its accounts receivable balance is uncollectible. DVS uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a: (Check all that apply.)

credit to Allowance for Doubtful Accounts for $2,500. debit to Bad Debts Expense for $2,500.

Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include:

the company does not want to deal with collecting receivables. the company needs cash.