Chapter 8 Smartbook
When accounting for accounts receivable and bad debts, the objectives are to _________.
- match the cost of bad debts to the accounting period in which the related credit sales are made - report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect.
The days to collect ratio is computed as ______
365 divided by the receivable turnover ratio
Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer?
Additional Sales Revenue
Which method of allowing for estimated uncollectible accounts is generally more accurate?
Aging of accounts receivable method
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, the ______.
Allowance for Doubtful Accounts will have a $90,000 credit balance
Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______.
Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance
The adjusting entry to record Bad Debt Expense includes a credit to Accounts Receivable. T/F
F
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.
Notes Receivable differ from Accounts Receivable in that Notes Receivable ______
It is collecting the principal on amounts lent earlier.
What is occurring if a company is debiting Cash and crediting Notes Receivable?
It is collecting the principal on amounts lent earlier.
The days to collect ratio provides what kind of information?
That a higher number of days means a longer (worse) time for collection The average number of days from sale on account to collection
In which situations does a company issue a note receivable?
The company lends money to employees or businesses. The company converts an existing account receivable to grant the customer an extended payment period for the amount owed plus interest.
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
Removing an uncollectible account and its corresponding allowance from the accounting records is called ______.
a write off
Which of the following is contra-asset account?
allowance for doubtful accounts
Using the allowance method, Bad Debt Expense is recorded _____.
as an estimate in the period of the related credit sales
The adjusting entry to record the allowance for doubtful accounts causes total ______.
assets to decrease stockholders' equity to decrease
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
The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to ______
bad debt expense
When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______.
credit to Allowance for Doubtful Accounts debit to Bad Debt Expense
The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a ______.
credit to Cash of $1,000 debit to Notes Receivable of $1,000
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 journal entry to record $5.6 million in sales on account includes a ______.
debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million
Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______.
debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000
The allowance method is a method of accounting that ______ for estimated bad debts.
decreases net accounts receivable
The 2 steps required using the allowance method, are to ______.
first make an end-of-period adjustment to record the estimated bad debts later write-off specific customer balances when they are known to be uncollectible
The receivables turnover ratio gives information on how ______.
many times the company sells and collects amounts on account per year
When accounting for accounts receivable, a primary objective is to ______.
not overstate assets and stockholders' equity by the estimated amount of bad debt
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
Net sales revenue is $720,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio.
The turnover equals 12.0 times (= $720,000/(($62,000 + $58,000)/2)).