Chapter 8 Practice Material

what two approaches discussed in this chapter can managers take to speed up sluggish collections of receivables? List one advantage and disadvantage for each approach.

(1) Factoring a: fast and easy d: negative message, factoring fee. (2)PayPal/national credit cards a: speeds up collection, reduces losses d:service fees

what are the three components of the interest formula? explain how this formula adjusts for interest periods that are less than a full year.

(1)principal: the amount of the note receivable (2)annual interest rate: charged on the note (3)time: period covered in the interest calculation - interest rates are always stated as an annual percentage

using the allowance method, is Bad Debt Expense recognized in the period in which (a) sales related to the uncollectible account were made or (b) the seller learns that the customer is unable to pay?

(a) sales related to the uncollectible account were made

what is the effect of the write-off of uncollectible accounts (using the allowance method) on (a) net income and (b) net accounts receivable?

(a) unaffected (b) unaffected

Describe how (and when) the direct write-off method accounts for uncollectible accounts. What are the disadvantages of this method?

How/when: reports Sales when they occur and Bad Debt Expense when it is discovered. Disadvantages: not acceptable under GAAP or IFRS, breaks matching principle.

what is the primary difference between accounts receivable and notes receivable?

Notes receivable charge interest from the day they are created to their maturity date.

in march 2015, target corporation decided to discontinue its Target credit card operations. What factors would this company have considered prior to making this decision?

They would have compared the gross profit given up as a result of lost credit card sales to the expenses given up

As of May 1, 2016, Krispy Kreme Doughnuts had $1,170,000 of Notes Receivable due within one year, $29,039,000 of Accounts Receivable, and $346,000 in its Allowance for Doubtful Accounts (assume all related to accounts receivable). How should these accounts be reported on a balance sheet prepared using GAAP?

Under GAAP, the Accounts Receivable would be reported as current asset, net of the Allowance for Doubtful Accounts ($29,039,000-$346,000=$28,693,000). Because the Notes Receivable are due within the upcoming fiscal year, they too would be reported as current asset

a local phone company had a customer who rang up $300 in charges during September 2018 but did not pay. Despite reminding the customer of this balance, the company was unable to collect in October, November, or December. In march 2019, the company finally gave up and wrote off the account balance. What amount of Sales, Bad Debt Expense, and Net Income would the phone company report from these events in 2018 and 2019 if it used the allowance method of accounting for uncollectible accounts? assume the company estimates 5 percent of credit sales will go bad.

Using the allowance method, the company would report $300 of revenue and $15 of Bad Debt Expense in 2018. In 2019, the write off would reduce Accounts Receivable and the Allowance for Doubtful Accounts, but it would not directly affect Net Income

how does the use of calculated estimates differ between the aging of accounts receivable method and the percentage of credit sales method?

While the percentage of credit sales method focuses on estimating Bad Debt Expense by multiplying the estimated percentage of bad debt losses by the current period's credit sales(income statement approach) for the period. The aging of accounts receivable method focuses on estimating the ending balance in the Allowance for Doubtful Accounts (balance sheet approach).

what are the advantages and disadvantages of extending credit to customers?

advantages: helps business customers buy products and services, thereby increasing the seller's revenues. disadvantages: increased wage costs, bad debt costs, and delayed receipt of cash.

which basic accounting principles does the allowance method of accounting for bad debts satisfy?

expense recognition ("matching") principle

does an increase in the receivables turnover ratio generally indicate faster or slower collection of receivables?

faster collection of receivables.