Accounting chapter 8 learn smart

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. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

$100 greater than

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

The objectives when accounting for accounts receivable and bad debts 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

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 Reason: Use the average, not ending Accounts Receivable. The turnover equals 12.0 times (= $720,000/(($62,000 + $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 Reason: Days to collect=365 days/accounts receivable turnover. Days to collect equals 30 days (=365/($730,000/(($62,000+$58,000)/2)),

The days to collect ratio is computed as ______

365 divided by the receivable turnover ratio

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.

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

Assuming the allowance method, the entry to record the write-off of a specific, non-paying customer is recorded with a debit to ______

Allowance for Doubtful Accounts and credit to Accounts Receivable

Assuming the allowance method, the entry to record the write-off of a specific, non-paying customer is recorded with a debit to ______.

Allowance for Doubtful Accounts and credit to Accounts Receivable

The allowance method requires that ______.

Allowance for Doubtful Accounts be netted against Accounts Receivable Bad Debt Expense be recorded in the same period as the related credit sales

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______.

Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950

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 ______. (Check all that apply.)

Allowance for Doubtful Accounts of $2,050 credit balance Bad Debt Expense of $2,000

ABC, Inc.'s unadjusted trial balance included Accounts Receivable $80,000 debit; Allowance for Doubtful Accounts $750 credit; and credit sales $400,000 credit. ABC uses the aging of accounts receivable method and estimates that $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report ______.

Allowance for Doubtful Accounts of $8,000 on the balance sheet Bad Debt Expense of $7,250 on the income statement

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

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.

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.

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

Percentage of credit sales

Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

Aging of accounts receivable

Estimates the allowance for doubtful accounts based on the age of each account receivable

Failing to record bad debt expense in the same period as the related revenue violates which principle?

Expense recognition (matching) principle

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.

On November 1, 2020, Lendem, Inc., loaned an employee $100,000 at 6% with both the interest and principal due in 1 year. The adjusting entry to record the interest generated but not received as of December 31, 2020 includes a debit to ______.

Interest Receivable of $1,000 Reason: Lendem records Interest Receivable, not Cash, of $1,000 (=$100,000 x 0.06/year x (2/12 year)).

Why would a company debit Interest Receivable?

It generated interest on its notes receivable which will be collected in a later accounting period

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

An adjusting entry to accrue for interest earned is often needed when a company has ______.

Notes Receivable

Which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the Allowance for Doubtful Accounts which will differ from the expense if there is an unadjusted balance?

Percentage of credit sales method

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

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.

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

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 Notes Receivable?

The receipt of the principal payment

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.

What effect does the collection of a note receivable, excluding interest, have on the accounting equation?

Total assets remain the same.

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

aging of accounts receivable

Uses more detailed data and is more accurate

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.

When will a bankrupt customer's accounts receivable be eliminated? When the company records ______.

a write off

Removing an uncollectible account and its corresponding allowance from the accounting records is called ______.

a write-off

A sale on account is recorded with a debit to _____ and a credit to ______

accounts receivable sales revenue

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 determine whether its customers ______.

are paying in accordance with the credit policy

Using the allowance method, Bad Debt Expense is recorded _____.

as an estimate in the period of the related credit sales

The revenue recognition principle requires an adjusting entry to accrue interest earned and includes a debit to Interest Receivable and a credit to Interest Revenue. What effect does this adjusting entry have on the accounting equation?

assets and stockholders' equity increase

If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then ______.

assets, net income, and stockholders' equity are understated by $1,000

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

The adjusting entry to record the allowance for doubtful accounts includes a ______.

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense

On February 1, Stretchers, Inc., receives $4,000 of interest of which $3,000 was generated and recorded in the prior accounting period ended December 31. The entry to record the collection of interest on February 1 includes a ______.

credit to Interest Receivable of $3,000 credit to Interest Revenue of $1,000 debit to Cash of $4,000

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.

credit; decrease

The adjusting entry to record interest owed

debit Interest Receivable and credit Interest Revenue

The entry to record the issuance of a note receivable is ______.

debit Notes Receivable and credit Cash

The issuance of a note

debit Notes Receivable and credit Cash

The receipt of the principal payment

debit cash credit notes receivable

The receipt of an interest payment

debit cash and credit interest receivable

The entry to record the write-off of a specific customer's account requires a ______.

debit to Allowance for Doubtful Accounts credit to Accounts Receivable

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 to Bad Debt Expense of $1,100 credit to Allowance for Doubtful Accounts of $1,100

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 credit to Allowance for Doubtful Accounts of $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

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

On March 1, Scents, Inc. lent $1,000 to an employee at a rate of 6% for 3 months. Scents' entry to record the loan of $1,000 to its employee includes a ______.

debit to Notes Receivable of $1,000 credit to Cash of $1,000

The Allowance for Doubtful Accounts, a contra-asset account, is ______ when specific uncollectible accounts are written-off.

debited

An employee paid a company back for amounts the company lent 3 months earlier. The company would record the collection from the employee by ______.

debiting Cash and crediting Notes Receivable

The allowance method is a method of accounting that ______ for estimated bad debts.

decreases 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

A company's Bad Debt Expense reports the ______.

estimated amount of this period's credit sales that customers will fail to pay

The direct write-off method is not allowed under GAAP because it violates the ______.

expense recognition (matching) principle

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

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

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, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

greater than

Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was ______ than the amount estimated in the prior period. Thus, bad debt expense will be ______ in the current period than had the unadjusted balance been a credit balance.

greater; greater Reason: A debit balance remaining in the Allowance account indicates that more was written off than was allowed for in the prior period. Thus, in the current period more will need to be expensed in order to compensate for not expensing enough in the prior period.

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

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, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet.

less than

Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is ______ the amount allowed in the prior accounting period.

less than

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.

may be dissatisfied with the product or service are more likely to default

When accounting for accounts receivable, a primary objective is to ______.

not overstate assets and stockholders' equity by the estimated amount of bad debt

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 debts expense avoid lengthy cash collection periods

Sales on account will cause an increase in ______.

sales revenue on the income statement accounts receivable on the balance sheet.

The fees charged by major credit card companies are included in ______.

selling expenses on the income statement

Notes receivable are used for ______.

selling large dollar-value items lending money to individuals or businesses extending payment periods

percentage of credit sales

simpler to apply but less accurate

The adjusting entry to record the allowance for doubtful accounts causes total ______.

stockholders' equity to decrease assets to decrease

Bad Debt Expense is a ______.

temporary account so its balance is closed (zeroed out) at the end of the accounting period

An objective of the expense recognition (matching) principle is to have bad debt expense debited in ______.

the same period the related credit sales are recorded