Ch 8 Orion

Newman Shoes and Bowman Footwear both decided to write off a specific customer's uncollectible account as a bad debt expense. If Newman Shoes uses the direct write-off method and Bowman Footwear uses the allowance method for uncollectible accounts, what will be the difference in the journal entries for these two companies?

Newman Shoes will record a debit to Bad Debt Expense, whereas Bowman Footwear will record a debit to Allowance for Doubtful Accounts.

Which of the following statements about a note receivable is true?

It can be transferred to another party by endorsement.

Do account receivables, trade receivables, and classified receivables require a lot of payment of interest if paid within a 30 day period.

No, they rarely require the payment

Other Receivables

Non-trade receivables (outside normal course of business) such as interest, loans to officers, advances to employees, and income taxes refundable.

Michael Co. accepts a $1000, 3-month, 12% promissory note is in settlement of an account with Tani Co. The entry to record this transaction is:

Notes Receivable 1,000 Accounts Receivable 1,000 On the date Michael accepts the note, Notes, Receivable is debited for $1,000 and Accounts Receivable is credited for $1,000. Interest is accrued only with the passage of time.

Valente Company received a $10,000, 12%, 1-year note from Andrea Foley on June 1st, as full payment on her account. Which of the following is the correct journal entry?

Notes Receivable 10,000 Accounts Receivable 10,000

Foti Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Bartelt Co. The entry to record this transaction is as follows:

Notes Recievable 1,000 Accounts Receivable 1,000

If a company is concerned about extending credit to a risky customer, it could do any of the following except:

Provide the customer a lengthy payment period to increase the chance of paying. a longer payment period will increase the chances the customer will not pay.

What happens if the amount of uncollectible account expense is understated at year end?

Net Accounts Receivable will be overstated

What happens if the amount of uncollectible account expense is overstated at year end?

Net Accounts Receivable will be understated.

Accounts Receivable Turnover

Net Credit Sales / Average Net Accounts Receivable

Four companies each have a credit term period of 30 days. Based on each company's net credit sales and average net accounts receivable for 2018, which company is having the MOST problem collecting their accounts receivable?

Net Credit Sales Average Net Accout Receivable Company 1 2.6M 198,000 Company 2 150,000 12,000 Company 3 490,000 27,000 Company 4 1.4M 153,000

The accounts receivable turnover is needed to calculate which of the following?

average collection period in days

A(n) ________ will cause accounts receivable turnover to increase.

shorter collection period

Often called------------ -------- , notes or accounts receivables result from sales transactions in which a written promise of amounts to be received is made.

trade receivables

What are notes or accounts receivable that result from sales transactions often called?

trade receivables

________ is used to calculate how quickly customers are making payments.

Accounts receivable turnover

________ are also called trade receivables.

Accounts receivables

Net credit sales for the month are $800,000. The accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage-of-receivables basis. If Allowance for Doubtful Accounts has a credit balance of $5000 before adjustment, what is the balance after adjustment?

$12,000, The ending balance required in the allowance account is 7.5% X $160,000, or $12,000. Since there is already a balnce of $5000 in Allowance for Doubtful Accounts, the difference of $7000 should be added, resulting in a balance of $12,000.

In 2017, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2017, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2017, $30,000 of uncollectible accounts receivable were written off. Past experience indicates tat the allowance should be 10% of the balacne in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to Allowance for Doubtful Accounts at December 31, 2017?

$32,000, After the write-offs are recorded. Allowance for Doubtful Accounts will have a debit balance of $12,000 ($18,000 credit beginning balance combined with a $30,000 debit for the write-offs). The desired balance, using the percentage-of-receivable basis, is a credit balance of $20,000 ($200,000X10%). In order to have an endign balance of $20,000, the required adjustment to Allowance for Doubtful Accounts is $32,000.

Hughes Company has a credit balance of $5000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debt epense which should be reported for the year is:

$55,000. By crediting Allowance for Doubtful Accounts for $55,000, the new balance will be the required balance of $60,000. This adjusting entry debits Bad Debt Expense for $55,000 & credits Allowance for Doubtful Accounts for $55,000.

Hughes Company has a debit balance of $5000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debt epense which should be reported for the year is: In this situation the same of bad debt expense that should be reported for the year is:

$65,000, By crediting Allowance for Doubtful Accounts for $65,000, the new balance will be the required balance of $60,000. This adjusting entry debits Bad Debt Expense for $65,000 and credits Allowance fr Doubtful Accounts for $65,000.

Kerrie Company on June 15 sells merchandise on account to Eng Co. For $1000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received?

$686, Because payment is made within the discount period of 10 days, the amount received is $700 ($1000-$300 return) minus the discount of $14 ($700X2%), for a cash amount of $686.

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal these data:

$735,000, The cash realizable value of the accounts receivable is Accounts Receivable ($800,000) less the expected ending balance in Allowance for Doubtful Accounts after adjustments ($65,000)-$735,000.

When recording the sale of receivables, what is the difference between journalizing a sale to a factor and a sale paid with a national credit card?

A sale to a factor affects two asset accounts and one stockholders' equity account, whereas a sale paid with a national credit card affects one asset account and two stockholders' equity accounts.

The financial statements of the Tyler Company report net sales of $300,000 and accounts receivable of $50,000 and $10,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for the Tyler Company?

10 times

What is the annual interest rate for a 60-day note issued with a face value of $2,500 that will earn interest of $42?

10.1% annual interest rate

The financial statements of the Harrison Company report net sales of $200,000 and accounts receivable of $10,000 and $5,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

13.5 days

The financial statements of the Imagine Company report net sales of $1,000,000 and accounts receivable of $700,000 and $300,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for the Imagine Company?

2 times

The financial statements of the Larson Company report net sales of $1,000,000 and accounts receivable of $80,000 and $60,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

25.5 days

Average Collection Period

365 / Accounts Receivable Turnover

Owen Industries reports an average collection period of 19.6 days. Beginning and ending accounts receivable are $28,665 and $19,782, respectively. What were Owen's net credit sales? Round to the nearest cent.

451,100.89 Dividing 365 days by the average collection period results in accounts receivable turnover of 19.6 times andmultiplying this figure by average accounts receivable of $24,223.50[($28,665 + $19,782) ÷ 2], results in net sales of $451,100.89.

Prall Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 7. What its average collection period (days)?

52 days. Average collection period = # of days in the year (365) / Accounts receivable turnover (7)= 52 days.

Eddy Corporation had net Credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. What was the accounts receivable turnoverand average collection period in days?

6.4 & 57 days. Accounts receivable turnover = Net sales ($800,000) / average net accounts receivable [($100,000+$150,000)/2]=6.4. The average collection period days = (365/6.4)=57 days.

The financial statements of R & P Imports report net sales of $600,000 and accounts receivable of $60,000 and $100,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for R & P Imports?

7.5 times

Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable.

Honor of Notes Receivable

A note is honored when its maker pays it in full at its maturity date.

A receivable that is evidenced by a formal instrument and that normally requires the payment of interest is:

A note receivable represent claims for which formal instrumenst of credit are issured as evidence of the debt. The not normally requires the payment of the pricipal & interest on a specific date.

Which of these statements about promissory notes is FALSE?

A promissory note is not a negotiable instrument. Promissory notes are negotiable instruments, meaning if sold, the seller can transfer to another party by endorsement.

Which of the following receivables would most likely be reported separately in a firm's financial statements, and why?

A salary advance to an employee, because it is not considered to be an "arm's length" transaction

Hunter's Paradise sells merchandize on account to Outdoor Haven for $3,280, terms 2/10, n/30. What should the journal entry be to record this transaction for Hunter's Paradise?

Accounts Receivable-Outdoor Haven 3280 Sales Revenue 3280

Assuming a 3/15, n/30 term and a merchandise return of $200, which of the following best explains what is meant by a journal entry that reads Cash 1,552 Sales Discount 48 Accounts Receivable-Adams Company 1,600

Adams Company originally made an $1,800 purchase then made its return and paid in full within 15 days.

Which of the following statements regarding reporting receivables on the balance sheet is true?

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.

Accounts Receivable

Amounts customers owe on account that result from the sale of goods and services. usually receive 30-60 days

Laser Company reports the following information for its most recent fiscal year, before adjustments: No alt text provided for this image An accounts receivable aging schedule results in $4,800 of estimated bad debts. If Laser uses the percentage-of-receivables basis to estimate bad debts, journalize the appropriate year-end adjusting entry.

Bad Debt Expense 2,700 Allowance for Doubtful Accounts 2,700

Schleps Co. holds Murphy Inc.'s $10,000, 120 day, 9% note. The entry made by Schleis Co. when the note is collected, assuming no interest has previously been accrued, is:

Cash 10,300 Notes Receivable 10,000 Interest Revenue 300 When Schleis receives payment, it will increase cash, reduce the notes receivable account, and reconize interest earned for the term of the note. Interest = $10,000x9%x120/360=$300. Total cash received = $10,000 + $300 =$10,300

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for mechandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Good Stuff Retailers will include a credit to Sales Revenue of $50,000 and debits to:

Cash $48,000 and Service Charge Expense $2000. The entry includes a credit to Sales Revenue for $50,000, a $48,000 debit to Cash, and a debit to Service Charge Expense for $2,000. The other choices are therefore incorrect.

Accounts & notes receivable are reported in the current assest section of the balance sheet at:

Cash (net) realizable value, Accounts & notes receivable are reported in the current assets section of the balance shet at cash (net) realizable value.

Green Inc. is the payee of a $10,000, 6-month, 12% note written by Yellow Inc. on November 1st, 2016. Green's fiscal year ends on December 31st. Given this situation, what accounting entries should Green make to record the receipt of payment in full on May 1st, 2017?

Cash = debit of $10,600; Notes Receivable = credit of $10,000; Interest Receivable = credit of $200; Interest Revenue = credit of $400

Four companies are trying to estimate their bad debt expense using the percentage-of-receivables basis. Assuming each company has a similar total Account Receivables balance and a similar estimated percentage collectible for the number of days past due, which company should record the HIGHEST amount of Bad Debt Expense? The table reports the company's percentage of total Accounts Receivable in each category. Company 1: Not Due-45%, 1-30 days past due-30%, 31-60 days past due-10%, Over 60 days past due-15% Company 2: Not Due-25%, 1-30 days past due-25%, 31-60 days past due-25%, Over 60 days past due-25% Company 3: Not Due-15%, 1-30 days past due-5%, 31-60 days past due-20%, Over 60 days past due-60%

Company 3

Receivables are frequently classified as:

Receivables are frequently classified as accounts receivable, notes receivable, and other receivables. The other choices are incorrect because receivables are not frequently classified as company receivables, employee receivables or general receivables

Both Curtis Flooring and Keller Roofing have estimated their uncollectible accounts for 2018 to be $14,000. In addition, both companies use the allowance method for uncollectible accounts. If Curtis currently has a debit balance in Allowance for Doubtful Accounts and Keller Roofing has a credit balance in Allowance for Doubtful Accounts, Keller Roofing will need to record a larger adjusting entry for their Allowance for Doubtful Accounts account.

The normal balance for Allowance for Doubtful Accounts is a credit balance. If the company currently has a credit balance, they will subtract the amount of the credit balance from the expected amount of uncollectible accounts to calculate the adjusting entry. This is Keller Roofing's situation. In contrast, if the company currently has a debit balance, they will add the amount of the debit balance to the expected amount of uncollectible accounts to calculate the adjusting entry. This is Curtis Flooring's situation. Therefore, Curtis Flooring's situation. Therefore, Curtis Flooring will have a larger adjusting entry for their Allowance for Doubtful Accounts account in order to reach $14,000 credit balance.

Maynard Mills received a 60-day, 5% note for $10,000 on April 5. Which of the following statements is true?

The principal of the note plus interest is due on June 4.

Maynard Mills received a 60-day, 5% note for $10,000 on April 5th. Which of the following statements is true?

The principal of the note plus interest is due on June 4th.

Which of these statements about Visa credit card sales is FALSE?

The retailer must wait to receive payment from the issuer. There is no wait for payment. The retailer receives payment at the time the credit card is accepted from the customer.

A company can accelerate its cash receipts by all of the following EXCEPT?

Writing off receivables. Writing off receivables will result in a company failing to collect any money.

Notes Receivable

Written promise (formal instrument or promissary note) for amount to be received. Also called trade receivables.

What is bad debt expense considered?

a necessary risk of doing business on a credit basis

Short-term receivables are reported in the current assets section of the balance sheet, -------short-term investments.

below

How is the average collection period computed?

by dividing 365 days by the accounts receivable turnover ratio

Retailers that issue their own credit cards ________ if ________ is not made within a certain time after the sale is made.

charge interest; payment in full

hen a retailer accepts national credit cards, setting credit limits and maintaining customer accounts are the responsibility of the

credit card company.

The entry to recognize the bad debt expense ________ when the allowance method is used.

decreases current assets

What is the accounts receivable turnover often used to analyze?

liquidity

What are the two key parties to a promissory note?

maker and the payee

When a note receivable is honored, Cash is debited for the note's ________ value.

maturity

Service Organization

records a receivable when it performs service on account

Merchandiser

records accounts receivable at the point of sale of merchandise on account.

If the allowance method is used to account for uncollectible accounts, when is bad debt expense debited?

when management estimates the amount of uncollectibles

Sarah and Luke each purchased $125 of merchandise from Owens Grocers on account. The terms of both sales were 1/7, n/30. Accounts that are not paid within 30 days are subject to a 2% monthly interest charge. If Sarah paid in 3 days and Luke paid in 36 days, what would be the difference in the merchandise company's records on the date the customers paid in full?

~Accounts Receivable—Sarah would be credited $125, and Accounts Receivable—Luke would be credited $127.50. Sarah's account would be credited for the full $125. Because Sarah paid within seven *days, the account would be paid with $123.75 cash from Sarah and a $1.25 sales discount ($125 * 1% = $1.25). Because Luke paid after 30 days, his account would be debited with $2.50 in interest ($125 * 2% = $2.50) on day 30. Therefore, on day 36, he would owe $125 + $2.50 = $127.50. If he paid in full with cash, his account would be credited for $127.50.

Accounts Receivable Turnover:

~Assess the liquidity of the receivables. ~Measure the number of times, on average, a company collects receivables during the period.

Allowance Method Losses are estimated:

~Better matching. ~Receivable stated at net realizable value. ~Required by GAAP.

Managing accounts receivable involves five steps:

~Determine to whom to extend credit. ~Establish a payment period. ~Monitor collections. ~Evaluate the liquidity of receivables. ~Accelerate cash receipts from receivables when necessary.

Extending Credit

~If the credit policy is too tight, you will lose sales. ~If the credit policy is too loose, you may sell to customers who will pay either very late or not at all. ~It is important to check references on potential new customers as well as periodically to check the financial health of continuing customers.

Direct Write-Off Theoretically undesirable:

~No matching. ~Receivable not stated at net realizable value. ~Not acceptable for financial reporting.

Three reasons for the sale of receivables:

~Size. ~Companies may sell receivables because they may be the only reasonable source of cash. ~Billing and collection are often time-consuming and costly

True statements regarding Visa credit card sales

~The credit card issuer conducts the credit investigation of the customer. ~The retailer is not involved in the collection process. ~The retailer receives cash more quickly than it would from individual customers.

TRUE statements about promissory notes

~The party making the promise to pay is called the maker. ~The party to whom payment is to be made is called the payee ~A promissory not is more liquid than an account receivable.

Average collection period:

~Used to assess effectiveness of credit and collection policies. ~Collection period should not exceed credit term period.