AC 210 Learn Smart Ch 8
The adjusting entry to record the estimated amount of bad credit sales is a debit to ___ ___ ___ and a credit to Allowance for Doubtful Accounts
bad debt expense
If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $9,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of ______
$1,000 credit [The Allowance for Doubtful Accounts is increased (credited) when the adjusting entry is recorded and is later decreased (debited) when specific accounts receivables are written off]
Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.
$100 less than [To arrive at the desired Allowance for Doubtful Accounts balance of $1,000 (=$10,000 x 10%), only $900 (=$1,000 minus the $100 credit unadjusted balance) needs to be credited to the Allowance account since there is already a $100 credit unadjusted balance in it]
In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______
$760 (38,000 x 0.02)
Net sales revenue is $720,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio
12.0 times [720,000/(620,000+58,000)/2)]
Net sales revenue is $730,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the days to collect.
30 days [365/(730,000/(62,000+58,000)/2)]
Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts?
Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.
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 credit balance of $1,000. After the adjustment, the ______
Allowance for Doubtful Accounts will have a $90,000 credit balance
Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method?
An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale
When a company receives the interest payment for a note that was issued in mid-November of the prior accounting period, the entry includes a debit to ______
Cash and credit to Interest Receivable and Interest Revenue
What are the potential drawbacks of speeding up collections of receivables?
Customers may get annoyed and take their business elsewhere, Hounding customers to pay if their receivables are past due is time-consuming and costly.
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.
Why would a company debit Interest Receivable?
It generated interest on its notes receivable which will be collected in a later accounting period.
What is occurring if a company is debiting Cash and crediting Notes Receivable?
It is collecting the principal on amounts lent earlier.
If a company is debiting Interest Receivable and crediting Interest Revenue, what must be the case?
It is the end of the of the accounting period and it is adjusting entry for interest generated but not yet collected.
What effect does the adjusting entry for interest earned but not yet received have on the accounting equation?
It results in an increase in assets and stockholders' equity.
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.
direct write off
Not considered an acceptable method under GAAP
Match each account with the proper description
Notes receivable (the principal amount), Interest receivable (the amount of interest earned but not yet collected), Interest revenue (the amount of interest earned)
Which of the following is recorded with a debit to Interest Receivable and a credit to Interest Revenue?
The adjusting entry to record interest earned but not yet received
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
During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?
Write off the uncollectible account and its corresponding allowance from the accounting records.
Removing an uncollectible account and its corresponding allowance from the accounting records is called ______
a write-off
Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.
accounts receivable are debited in the period the revenue is recognized, bad debt expense is estimated and recorded with an adjusting entry, specific customer balances are written off
Which method of allowing for estimated uncollectible accounts is generally more accurate?
aging of accounts receivable
Which of the following is a permanent account whereby the ending balance of the prior accounting period equals its beginning balance of the next
allowance for doubtful accounts
Which of the following is contra-asset account?
allowance for doubtful accounts
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 has a $90,000 credit balance [The aging method specifies the desired ending balance in the Allowance account which is $90,000. The $1,000 unadjusted debit balance in the Allowance for Doubtful Accounts needs to be increased by $91,000 to get to the desired $90,000 credit Allowance for Doubtful Accounts balance on the balance sheet. The adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (+E,-SE) and credit to Allowance for Doubtful Accounts (+xA,-A) of $91,000]
Accounts Receivable represent ______
amounts owed to a business by its customers
Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______
an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December
By comparing the number of days to collect with the length of the credit policy, companies can infer that customers ______ if the days to collect is high
are more likely to default, may be dissatisfied with the product or service
By comparing the number of days to collect with the length of the credit policy, companies can determine whether its customers _____
are paying in accordance with the credit policy
Sales on account increases ______
assets and stockholders equity, accounts receivable on the balance sheet, and sales revenue on the income statement
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 (In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount)
A _____ stuffing scenario refers to when a company increases its credit sales by selling to less financially secure customers
channel
A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest _____
channel stuffing
Allowance for Doubtful Accounts is a(n) ____ -asset account and has a normal _____ balance
contra, credit
ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy?
credit card companies charge fees that reduce profits
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
Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a ______.
debit bad debit expense for $1,000 and credit allowance doubtful accounts $1,000
Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a ______
debit bad debt expense of $1,100 and credit allowance for doubtful accounts $1,100
What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months?
debit notes receivable, credit cash
The entry to record the write-off of a specific customer's account requires a ______
debit to ADA, credit to AR
If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts using the aging of accounts receivable method, then it must mean that the ______
debit to Bad Debt Expense will be $1,000 more than the desired ending balance in the Allowance for Doubtful Accounts
The adjusting entry to record the allowance for doubtful accounts includes a ______
debit to bad debt expense and a credit to allowance for doubtful accounts
Using the aging approach, management estimates that $1,000 of Accounts Receivable 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 $900 and credit to allowance for doubtful accounts for $900
The correct journal entry for the collection of a note receivable includes a ______. Assume the collection of interest is recorded separately
debit to cash, credit to notes receivable
ABC Corp. received a 2-month, 8% per year, $1,500 note receivable on December 1. The adjusting entry on December 31 will include a ______
debit to interest receivable of $10 [1500 x 8% x 1/12]
The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a ______
debit to notes receivable for $1,000 and a credit of $1,000 cash
The Allowance for Doubtful Accounts, a contra-asset account, is ______ when specific uncollectible accounts are written-off
debited [The Allowance for Doubtful Accounts is a contra-asset account, its normal balance is a credit. Thus, debits, not credits, decrease this account. Originally, the adjusting entry recorded an estimated amount of uncollectible accounts with a debit to Bad Debt Expense (+E,-SE) and credit Allowance for Doubtful Accounts (+xA,-A). Accounts Receivable could not be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, the specific customer's Accounts Receivable (-A) can now be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it]
The allowance method is a method of accounting that ______ for estimated bad debts
decrease net accounts receivable
The _____ write-off method is not allowed under GAAP
direct
A high receivables turnover ratio is a sign of a company's ______
effectiveness in granting and collecting credit
The direct write-off method is not allowed under GAAP because it violates the ______
expense recognition (matching principle)
The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the ______
expense recognition (matching) principle
True or false: The adjusting entry to record Bad Debt Expense includes a credit to Accounts Receivable
false (ada is credited, not ar)
True or false: It is important for companies to use the services of a collection agency as soon as a customer is late in paying.
false [being forceful too soon could result in loss or future sales]
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
Notes Receivable differ from Accounts Receivable in that Notes Receivable _____
generally charge the borrowers interest from the day they are signed to the day they are collected
The entry to record the write-off of a specific customer's account ______ when using the allowance method
has no net effect on total assets, liabilities or stockholders' equity [The write-off of a specific customer's account debits Allowance for Doubtful Accounts (-xA,+A) and credits Accounts Receivable (-A). There is no effect on total assets because they offset each other. The adjusting entry, debit Bad Debt Expense (+E,-SE) and credit Allowance for Doubtful Accounts (+xA,-A), is when assets and stockholders' equity are reduced. The adjusting entry is recorded in the same period as the related credit sales in accordance with the expense recognition principle]
Sales made on account are recorded with a debit to Accounts Receivable and credit to Sales Revenue for the price times the quantity. Management knows that some of those accounts will not be collected but is unsure which specific customers it will be. Thus, management estimates the amount and records an adjusting entry. Later, when the specific non-paying customer is identified, it writes off the account. The effect of the write off on the accounting equation is to _____
increase one asset and decrease another
The receivables turnover ratio gives information on how _____
many times the company sells and collects amounts on account per year
An adjusting entry to accrue for interest earned is often needed when a company has ______
notes receivable
Allowance for Doubtful Accounts is a ______
permanent account so its balance carries forward to the next accounting period
Which of the following are advantages of using national credit cards?
reduction of bad debt expenses, avoid lengthy cash collection periods
A receivable write-off removes a non-paying customer's account receivable and ______
removes the same amount from allowance for doubtful accounts
When accounting for accounts receivable and bad debts, the objectives are to ______
report accounts receivable at the net realizable value which equals accounts receivable less the amount the company does not expect to collect, match the cost of bad debts to the accounting period in which the related credit sales are made
Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings?
sales revenue, depreciation expense, bad debt expense
The fees charged by major credit card companies are included in _____
selling expenses on the income statement
percentage of sales
simpler to apply but less accurate
The adjusting entry to record the allowance for doubtful accounts causes total ______
stockholders equity and assets to decrease
Why is the Bad Debt Expense on the income statement less than the Allowance for Doubtful Accounts on the balance sheet?
the allowance for doubtful accounts had an unadjusted credit balance
When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ______
the company would lose track of which customers still owe money, the amounts are estimates and no one knows which particular customers will not pay
Match the entry that would be recorded for the 4 key events related to issuing an interest-bearing note.
the issuance of a note (debit notes receivable and credit cash), the adjusting entry to record interest owned (debit interest receivable and credit interest revenue), the receipt of an interest payment (debit cash and credit interest receivable), the receipt of the principal payment (debit cash and credit notes payable)
What is the effect on the accounting equation if a company does not write off specific, non-paying customers' accounts receivable?
there is no effect (The write off of a specific customer's account debits Allowance for Doubtful Accounts (-xA,+A) and credits Accounts Receivable (-A); thus, there is no effect on total assets whether an account is written off or not.]
True or false: To ensure bad debt expense and the allowance for doubtful accounts do not become materially misstated over time, management will revise overestimates of prior period by lowering estimates in the current period
true [If the Allowance for Doubtful Accounts has an exceeding large credit balance because more was estimated to be uncollectible than was actually written off, management will lower its estimates in the current period]
aging of accounts receivable
uses more detailed data and is more accurate
