Smartbook Ch 5

On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?

Debit Notes Receivable $100,000; credit Service Revenue $100,000

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate

A trade discount is

a reduction from list price

An account receivable is normally classified as

an asset

The income statement approach for estimating bad debts focuses on

current year's credit sales

A(n) balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low.

debit

At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too high

The direct write-off method is required for

income tax purposes.

A calendar-year-end company that accepts a 3-month interest-bearing note on December 1 must accrue revenue on December 31. (Enter only one word.)

interest

Total revenues less discounts, returns, and allowances are referred to as revenues. (Enter only one word.)

net

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will ______ net income.

not affect

A(n) receivable typically yields interest revenue and possesses a fairly high probability of collectibility.

notes

The ______ ratio shows the number of times during a year that the average receivable balance is collected.

receivables turnover

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) . (Enter only one word per blank.)

sales return

For accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

$18,000 Reason: $20,000 - $2,000

Net revenues is calculated as total revenues minus which of the following items?

- Sales discounts - Sales returns - Sales allowances

Abby Fashions sells a suit to a customer for $600 on account. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby Fashions grants the customer a $60 credit. Abby Fashions will record:

- credit to Accounts Receivable $60 - debit to Sales Allowances $60

What comparative advantages do notes receivables possess compared to other receivables? (Select all that apply.)

- interest-bearing - higher likelihood of collectibility

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

- receivables turnover ratio - average collection period

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Notes receivable normally has a(n) balance because it is classified as a(n) . (Enter only one word per blank.)

Blank 1: debit Blank 2: asset

Bad debt expense is reported on the and is classified as an operating expense.

Blank 1: income Blank 2: statement

When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?

Make an adjusting entry at the end of the current period to accrue the interest earned.

Match each description with the correct term. Sales return Sales allowance

Sales return - A customer returns merchandise purchased during the month and receives a refund of the full sales price Sales allowance - A customer receives a partial refund of the sales price after the customer discovers a flaw in the merchandise. The customer keeps the merchandise.

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable

The percentage-of-receivables method of estimating bad debt applies ______ to ______.

a single percentage; accounts receivable

A(n) is the legal right to receive cash from a credit sale and represents an asset of the company.

account receivable

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as

accounts receivable

A sales return occurs when a customer returns a product for a full refund, whereas a sales is when the customer keeps the product and obtains a partial refund.

allowance

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the

allowance method

Accounts receivable should be classified as a(n)

asset

The cost of estimated accounts receivable that will not be collected is referred to as expense.

bad debt expense

The income statement approach for estimating bad debts uses a percentage of

credit sales

When a business provides services to a customer, and the customer promises to pay later, this is referred to as

credit sales

Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a

credit to Allowance for Uncollectible Accounts.

Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include

debit Allowance for Uncollectible Accounts.

The receivables turnover ratio and the average collection period provide information about a company's

effectiveness in managing receivables

At the beginning of the year, Blocker Company's allowance account has a debit balance of $10,000. This may indicate that the

estimate of uncollectible accounts was too low.

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

Accounts receivable are typically classified as current assets because

they will be converted to cash within 1 year.

The allowance method estimates

uncollectible accounts

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial

Under the allowance method, companies estimate ______ uncollectible amounts and report those estimates in the ______ year.

future; current

(Face value x annual interest rate x fraction of the annual period) is the formula for

interest on a note

An aging schedule classifies accounts receivable based on

length of time outstanding

The percentage-of-receivables approach to measuring bad debt expense is referred to as ______ method.

a balance sheet

Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):

decrease in Accounts Receivable

A sales allowance ______ the amount owed by the customer for merchandise that is ______ by the customer.

decreases; retained

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

Accounts receivable are normally classified

in the balance sheet as assets

A formal, signed credit agreement between a lender and a borrower is called a(n) ______ by the lender.

note receivable

"Net credit sales" refers to credit sales net of:

- allowances - discounts - returns

The allowance method is required by . (Enter one word or abbreviation per blank)

GAAP

The estimated expense for accounts that may not be collected is referred to as

bad debt expense

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Accounts Receivable.

Pine Corporation provides $1,000 of services on account with terms 2/10, n/30. If the customer takes the discount and pays within 10 days, Pine will receive

$980

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated

Receivables not expected to be collected should

not be counted in assets of the company

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable

Bad debt expense is reported on the:

income statement

Below is a schedule of accounts receivable. Using the aging method, determine the ending balance in the allowance for uncollectible accounts. Length of Time Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Accounts Receivable Balance $100,000 60,000 20,000 50,000 Percentage Estimated Uncollectible 1% 2% 3% 4%

$4,800 Reason: (100k x .01) + (60k x .02) + (20k x .03) + (50k x .04)

Below is a schedule of accounts receivable. Using the aging method, determine the ending balance in the allowance for uncollectible accounts. Length of time outstanding 0-30 days 31-60 days 61-90 days Over 90 days Accounts receivable balance $200,000 100,000 50,000 40,000 Percentage estimated uncollectible 0.5% 1 2 6

$5,400 Reason: (200k x .005) + (100k x .01) + (50k x .02) + (40k x .06)

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000 Reason: $100,000 - $7,000

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15? (Select all that apply.)

- Credit to Accounts Receivable. - Debit to Sales Returns.

When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?

- Debit Accounts Receivable. - Credit Allowance for Uncollectible Accounts.

Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

- Debit to Allowance for Uncollectible Accounts - Credit to Accounts Receivable

A company makes a sale on terms 2/10, n/30. What does this mean? (Select all that apply.)

- If payment is not made in 10 days, the net amount is due in 30 days. - The customer may take a 2% discount off the price if paid within 10 days.

The journal entry to record bad debt expense includes: (Select all that apply.)

- debit to bad debt expense - credit to allowance for uncollectible accounts

York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows: (Select all that apply.)

- equity decreases - assets decrease

The financial statement effects of recording an allowance for estimated sales returns are that: (Select all that apply.)

- equity decreases - assets decrease - net income decreases

A trade discount is a reduction from the list price, which is used to: (Select all that apply.)

- give quantity discounts to customers - change prices without publishing a new catalog - disguise real prices from competitors

Two entries are required when a previously written off account is collected. These two entries include:

- reinstate the account receivable - record the collection on the account receivable

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

- sales on account - credit sales

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to

be more accurate

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days Reason: 365/receivables turnover = 40.6 days

Black Company has the following information: Receivable turnover 6 Inventory turnover 5 Asset turnover 3 Net credit sales $500,000 What is the average collection period?

60.8 days

Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?

As a noncurrent asset

The ratio that shows the approximate number of days the average accounts receivable balance is outstanding is referred to as the average .

Blank 1: collection Blank 2: period

The amount of net credit sales is reported on the .

Blank 1: income Blank 2: statement

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) approach to measuring bad debts. (Enter only one word per blank.)

Blank 1: income Blank 2: statement

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales

allowance

The normal balance of notes receivable is:

a debit

The allowance for uncollectible accounts is a contra account to

accounts receivable

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the method of accounts receivable. (Enter only one word.)

aging

To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to

allowance for uncollectible accounts.

Sales Returns and Sales Allowances are - accounts and require a debit entry to increase the account.

contra revenue

The Sales Returns and Sales Allowances accounts are classified as

contra revenue accounts

Allowance for Uncollectible Accounts has a credit balance because it is a(n) ______ account.

contra-asset

A(n) balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high.

credit

The account "Allowance for Uncollectible Accounts" normally has a balance. (Enter only one word.)

credit

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a

debit to Notes Receivable, $40,000

Kilroy Corporation provides services to a customer for $1,000. The customer complained that there was a slight defect in the service. Kilroy granted the customer a $50 credit. Kilroy will record this adjustment to the sales price with a

debit to Sales Allowances $50

Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record ______ bad debt expense ______.

estimated; at the end of the year

The formula for calculating interest on a note is

face value x annual rate x fraction of the annual period

A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) discount.

sales

The receivables turnover ratio indicates

the number of times during a year that the average accounts receivables were collected