ATG Ch. 8

Match the description with the appropriate methods. % of credit sales Aging of A/R Direct Write off

% of credit sales- Simpler to apply but less accurate. Aging of A/R- uses more detailed data and is more accurate. Direct Write off - not considered an acceptable method under GAAP.

What are advantages of using national credit cards?

- Reduction of Bad Debts Expense - Avoid length cash collection periods

In which situations does a company issue a note receivable?

- The company converts an existing accounts receivable to grant the customer an extended payment period for the amount owed plus interest. - The company lends money to employees or businesses.

Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order from top to bottom. Bad Debt Expense is estimated and recorded with an adjusting entry. Specific customer balances are written off. A/R are debited in the period the revenue is recognized.

1. A/R are debited in the period the revenue is recognized. 2. Bad Debt Expense is estimated and recorded with an adjusting entry. 3. Specific customer balances are written off.

Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually.

1. Debit Notes Receivable and credit Cash 2. Debit Interest Receivable and credit Interest Revenue. 3. Debit Cash and credit Interest Receivable 4. Debit Cash and credit Notes Receivable, Interest Revenue and Interest Receivable

_____ Receivable arise from making sales to customers on account and non-interest bearing. _____ Receivable are formal written contracts that are interest bearing.

Account, Notes

The adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to _______ ________ ________ _________ .

Allowance for Doubtful Accounts

The 3 variables needed to calculate interest are the:

Annual Interest Rate Time period covered in the interest calculation Principal

Rank companies A-C based on how favorable their receivables turnover ratio is (from most favorable on the top to least favorable). (Assume the companies have similar credit terms.) Company A: 3.4 times Company B: 5.6 times Company C: 2.4 times

B A C

The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantage of extending credit are costs related to ____.

Bad debt expense

Which company has the higher receivables turnover ratio? Company A: Avg. Net A/R= $2,000, Avg. Inv.= $4,000, Net Sales= $40,000. Company B: Avg. Net A/R= $5,000, Avg. Inv.= $20,000, Net Sales= $100,000.

Both have the same receivables turnover ratio of 20 times. Company A= $40,000/$2,000 = 20 times Company B= $100,000/$5,000 = 20 times

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 is the days to collect formula?

Days to collect = 365/Receivables Turnover Ratio Receivables Turnover Ratio= Net Sales/Avg. Net A/R

What is the journal entry for: The receipt of an interest payment

Debit Cash Credit Interest Receivable

What is the journal entry for: The receipt of the principal payment

Debit Cash Credit Notes Receivable

What is the journal entry for: The adjusting entry to record interest owed

Debit Interest Receivable Credit Interest Revenue

What is the journal entry for: The issuance of a note

Debit Notes Receivable Credit Cash

The journal entry to record $5.6 million in sales on account includes a....

Debit to A/R for $5.6 million Credit to Sales Rev. $5.6 million

The entry to record lending $1,000 to an employee at a rate of 6% for 8 months includes a ______.

Debit to Notes Receivable and a credit to Cash of $1,000.

Which of the following are disadvantages of extending credit to customers?

Delayed receipts of cash Increased bad debt costs Increased wage costs

The ______ write-off method is not allowed under GAAP.

Direct

A company lends $1,000 each to two employees at a rate of 6% on December 1st. One employee is to repay the note in 3 months and the other in 6 months. At December 31, how much interest will the company accrue? Round to the nearest dollar.

Each employee owes the company for one month's interest or 1/12 of the 6% annual interest rate. Interest = $2,000 Principal*6% Interest Rate* 1/12 year = *$10* . The maturity dates of 3 and 6 months does not affect the amount of interest generated per month. It does affect how much interest the company will earn at maturity which is $1,000*6%*(3/12) from one employee and $1,000*6%*(6/12) from the other.

Accounting principle that governs the recording of bad debt expense in the same period as the sales revenue is known as the ____.

Expense recognition (matching) principle

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 _______.

Interest is not generated or recorded until time has passed. Debit to Notes Receivable of $1,000 and credit to Cash of $1,000.

Collection of a previously written-off account is called a ____

Recovery

Murphy's Paw, Inc. has credit sales of $100,000 for the month ended May 31. The A/R balance is $8,000. Management estimates that 1% of *credit sales* will be uncollectable. This adjusting entry includes a debit and credit to ____.

The adjusting entry using the % of *credit sales* will be for $1,000 (=$100,000 credit sales*1%). The debit is to Bad Debt Expense (+E,-SE) and credit to AFDA (+A,-A).

The days to collect ratio provides what kind of information?

The average # of days from sale on account to collection. That a higher # of days means a longer (worse) time for collection.

Which account is used to reduce assets for the amount of estimated bad debts?

The contra-asset account: Allowance for Doubtful Accounts

Why is bad debt expense an estimate?

The expense recognition principle requires the expense to be debited in the same period as the credit sale, which is before knowing who specifically will not pay.

The journal entry for the direct write-off method?

The journal entry for the direct write-off method includes a debit to Bad Debt Expense and a credit to A/R.

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

Total assets remain the same.

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.

Bad Debt Expense is

an estimate and is a cost of extending credit to customers.

The receivables turnover ration gives info on how ___.

many times the company sells and collects amounts on account per year.

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 and credit to AFDA of $1,100. To arrive at the desired $1,000 credit balance in the AFDA, Bad Debt Expense must be debited and the Allowance must be credited for $1,100. The amount expensed needs to be $1,100 in order to make up for the $100 unadjusted debit balance in the Allowance account. The $100 debit means the company did not expense enough in the prior period and thus must expense an additional $100 to get the desired balance.