ACCT EXAM 3
when a company does extend credit directly to customers it...
1. maintains a separate account receivable for each customer 2. accounts for bad debts from credit sales
why do sellers allow customers to use 3rd party credit cards?
1. the seller does not have to evaluate each customers credit standing 2. the seller avoids the risk of extending credit to customers who cannot pay 3. the seller typically receives cash from the cart company sooner than if it had granted customers credit directly 4. cause a potential increase in sales volume
Direct Write off method:
:)
on march 14, ian co accepted a 180 day 5% note in the amount of $1,000 from Ali co, a customer. On the due date of the note, Ali fails to pay. The journal entry Ian would record on the date would include:
DR accounts receivable ($1,025) CR Interest Revenue ($25) CR notes receivable ($1,000)
now how do you record the bad debt using the direct write off method 1. reinstate account previously written off 2. record full payment of account
DR accounts receivable J Kent $520 CR bad debts expense $520 DR cash $520 CR accounts receivable J Kent $520
Now, record the cash received after the deposite
DR accounts receivable- credit card Co $96 DR credit card expense $4 CR sales $100
How are accounts receivable from credit sales recorded
DR accounts receivable-store CR Sales DR cash CR Accounts receivable - Buyer
to demonstrate-if tech com determines on Jan 23 that it cannot collect $520 owed by its customer j Kent it recognizes the loss using the direct write off method:
DR bad debts expense $520 CR accounts receivable J kent $520
To demonstrate if TechCom has $100 of credit cart sales with a 4% fee and its $96 cash is received immediately on deposit, the entry is:
DR cash $96 DR credit card expense $4 CR Sales $100
Kaiven company accepted a $12,000, 60 day, 6% note on December 21 from Diaz co, granting a time extension on his past due account receivable. The adjusting entry on Dec 31 would include a debit to:
Interest receivable for $20 (12,000 x .06 x 10/360)
credit sales are recorded by increasing (debiting)...
accounts receivable
accounts receivable
amounts due from customers for credit sales
receivable
an amount due from another party
when a company directly grants credit to its customers, it expects that some customers will not pay what they promised. these accounts are called...
bad debts or uncollectable accounts
to compute interest due on maturity date, use the formula
principle x interest rate x time fraction of year
direct write off method
records the loss from an uncollectible account receivable when it is determined to be uncollectable
materiality constraint
states that an amount can be ignored if it is effect on the financial statement is unimportant to he users business decesions
