Ch 8 Study Guide

In August, Bon Firewood takes advantage of an opportunity to earn income on excess cash, which requires a $15,000 investment. The investment will pay interest annually every March, beginning in the upcoming year. What type of receivable will Bon Firewood record for the interest owed in March? How will the receivable be classified on the balance sheet?

1. Interest receivable 2. The interest receivable will be classified as a current asset on the balance sheet. **Accounts receivable are amounts owed by customers who put the purchase on their account. Since the seller typically gives credit to the customer for less than a year, it is classified as a current asset. Notes receivable are more formal than accounts receivable, with longer credit periods, which will determine if it is a current or noncurrent asset. The notes receivable agreements are written on notes to clarify the time period and amount owed. Other receivables depend on the type of payment the business will receive. Other receivables are also classified based upon the payment date.

Using the information in Exercise 25, assume that Red Houses Inc. doesn't pay the amount due on the note's due date. Prepare the journal entry to record the dishonored note receivable.

Accounts Receivable—Red Houses Inc. (+A) Debit $4,067 / Notes Receivable—Red Houses Inc. (-A) Credit $4,000 / Interest Revenue Credit $67 **Interest revenue = $4,000 × 10% × (60 ÷ 360)

Paper Supply Inc. accounts for its uncollectible receivables using the method required by generally accepted accounting principles (GAAP). Does Paper Supply Inc. use the direct write-off or the allowance method to account for its uncollectible receivables?

Allowance method

Kitchen Gadgets estimates its uncollectible accounts as a percentage of credit sales for the period. Which method of accounting for uncollectible receivables does the business use?

Allowance method **The direct write-off method records bad debt expense only when a specific account receivable has been identified as being uncollectible. The journal entry records the bad debt expense with the account receivable directly related to the expense. The allowance method prepares an estimate for the uncollectible accounts and adjusts the allowance for doubtful accounts accordingly.

Use the allowance method for uncollectible receivables to record the following transactions: a. Wrote off $2,100 of the balance owed from Bryan Terry on August 12. b. On October 5, reinstated Bryan Terry's account for $1,670 and received cash for the same amount.

a. Allowance for Doubtful Accounts (+A) Debit $2,100 / Accounts Receivable—Bryan Terry (-A) Credit $2,100 b. Accounts Receivable—Bryan Terry (+A) Debit $1,670 / Allowance for Doubtful Accounts (-A) Credit $1,670 b. Cash (+A) Debit $1,670 / Accounts Receivable—Bryan Terry (-A) Credit $1,670

Camel Bookstore records uncollectible accounts receivable using the allowance method. The company had total sales of $15,600,000, 35% of which were credit sales. The company expects that ⅝% of credit sales will be uncollectible. a. Prepare the adjusting entry on December 31 to record the bad debt expense for the year. b. If the company's ending balance for Allowance for Doubtful Accounts was $50,240, what was the balance before the adjusting entry?

a. Bad Debt Expense (-) Debit $34,125 / Allowance for Doubtful Accounts (-A) Credit $34,125 **Bad Debt Expense: $15,600,000 × 35% × ⅝% b. $16,115 **($50,240 - $34,125)

ToolBox Co. records $6,200 of sales on account to Roger Small on January 15. This is the only amount owed to the company by Roger Small. Prepare the journal entries to record the following transactions for ToolBox Co. using the direct write-off method: a. Received $3,800 cash from Roger Small on March 3 for the balance owed b. Wrote off the remainder owed by Roger Small as uncollectible on June 30. c. Reinstated Roger Small's account for $2,000 and received a $2,000 cash payment on August 1.

a. Cash (+A)- Debit $3,800 / Accounts Receivable—Roger Small (-A) Credit $3,800 b. Bad Debt Expense (-E) Debit $2,400/ Accounts Receivable—Roger Small (-A) Credit $2,400 c. Accounts Receivable—Roger Small (+A) Debit $2,000 / Bad Debt Expense (+E) Credit $2,000 c. Cash (+A) Debit $2,000 / Accounts Receivable—Roger Small (-A) Credit $2,000

Use the direct write-off method to record the following transactions for Carolina Costumes: a. Wrote off $1,250 of the amount owed from Rose McDonald on January 29. b. Reinstated $1,450 of a previously written off account receivables from Rory Smith and received cash payment for the amount on March 20. c. Reinstated $950 of Rose McDonald's account receivable upon payment on May 5.

a. Bad Debt Expense (-E) Debit $1,250 / Accounts Receivable—Rose McDonald (-A) Credit $1,250 b. Accounts Receivable—Rory Smith (+A) Debit $1,450 / Bad Debt Expense (+E) Credit $1,450 b. Cash (+A) Debit $1,450 / Accounts Receivable—Rory Smith (-A) Credit $1,450 c. Accounts Receivable—Rose McDonald (+A) Debit $950 / Bad Debt Expense (+E) Credit $950 c. Cash (+A) Debit $950 / Accounts Receivable (-A) Credit $950 ** See next

Camel Bookstore uses the allowance method to record uncollectible accounts receivable. For the year, the company's credit sales totaled $5,752,000. The company expects that ¾% of all credit sales will be uncollectible. a. Prepare the adjusting entry on December 31 to record the bad debt expense for the year. b. The company's balance for Allowance for Doubtful Accounts before making any adjusting entries was $13,600. What will the adjusted balance of the account be?

a. Bad Debt Expense (-E) Debit $43,140 / Allowance for Doubtful Accounts (-A) Credit $43,140 **Bad Debt Expense: $5,752,000 × ¾% b. $56,740 **($13,600 + $43,140)

Eddy Book Co. uses the allowance method to record uncollectible accounts receivable. The company had credit sales of $8,900,000 for the year and a balance of $2,200 in Allowance for Doubtful Accounts before any adjusting entries. The company has a calendar year-end. a. Prepare the adjusting entry to record the bad debt expense for the year if the company expects that ½% of credit sales will be uncollectible. b. What will the adjusted balance of Allowance for Doubtful Accounts be at year-end?

a. Bad Debt Expense (-E) Debit $44,500 / Allowance for Doubtful Accounts (-A) Credit $44,500 **Bad Debt Expense: $8,900,000 × ½% b. $46,700 **($2,200 + $44,500)

Prepare the journal entries to record the following transactions if Keller Products uses the allowance method to account for uncollectible receivables. a. Received $900 in cash from Eli McDonald and wrote off the remaining amount owed of $1,450 from Eli McDonald on February 15. b. Reinstated the entire amount of Eli McDonald's accounts receivable owed and received the cash for payment in full on June 2.

a. Cash (+A) Debir $900 / Allowance for Doubtful Accounts (+A) Debit $1,450 / Accounts Receivable—Eli McDonald (-A) Credit $2,350 b. Accounts Receivable—Eli McDonald (+A) debit $1,450 / Allowance for Doubtful Accounts (-A) Credt $1,450 b. Cash (+A) Debit $1,450 / Accounts Receivable—Eli McDonald (-A) Credit $1,450

Using the allowance method, record the following transactions for Olive Oils Inc.: a. Received $1,000 in cash for Brad May's outstanding account receivable and wrote off the remainder of $750 on July 6. b. Reinstated Brad May's account for the amount previously written off on December 21. Brad May paid for the amount owed in full.

a. Cash (+A) Debit $1,000 / Allowance for Doubtful Accounts (-A) Debit $750 / Accounts Receivable—Brad May (-A) $1,750 b. Accounts Receivable—Brad May (+A) Debit $750 / Allowance for Doubtful Accounts (-A) Credit $750 b. Cash (+A) Debit $750 / Accounts Receivable- Bryan May (-A) Credit $750 **see next

Prepare the journal entries to record the following transactions for Carolina Costumes using the direct write-off method: a. Received $1,450 from Dillon Berry and wrote off the remainder owed of $2,130 as uncollectible on September 12. b. On December 18, reinstated the entire account of Dillon Berry and received $2,130 cash as payment for the remaining amount owed.

a. Cash (+A) Debit $1,450 / Bad Debt Exp (-E) Debit $2,130 / Acts Recv. Dillon Berry (-A) $3,580 b. Accounts Receivable—Dillon Berry (+A) Debit $2,130 / Bad Debt Expense (+E) Credit $2,130 b. Cash (+A) Debit $2,130 / Accounts Receivable—Dillon Berry (+A) $2,130

KAA Co. issues a $2,500 promissory note to Mane Attractions on August 1 in settlement of its past due account receivable. The note states a due date in 30 days with a 12% interest rate. a. Record the journal entry for the issuance of the note. b. Prepare the journal entry for KAA Co. on the due date, assuming that Mane Attractions pays the promissory note.

a. Notes Receivable—Mane Attractions Debit $2,500 / Accounts Receivable—Mane Attractions (-A) Credit $2,500 b. Cash (+A) Debit $2,525 / Notes Receivable—Mane Attractions (-A) Credit $2,500 / Interest Revenue (+E) $25 **Interest revenue = $2,500 × 12% × (30 ÷ 360)

On March 1, KAA Co. issues a $4,000 promissory note to Red Houses Inc. in settlement of its account receivable, which is three months past due. The note will be due in 60 days and has a 10% interest rate. a. Record the journal entry for the receipt of the note. b. Prepare the journal entry for KAA Co. on the due date, assuming that Red Houses Inc. pays the promissory note. Round interest to the nearest whole dollar.

a. Notes Receivable—Red Houses Inc. (+A) Debit $4,000 / Accounts Receivable—Red Houses Inc. (-A) Credit $4,000 b. Cash (+A) Debit $4,067 / Notes Receivable—Red Houses Inc. Credit (-A) $4,000 / Interest Revenue (+E) Credit $67 **Interest revenue = $4,000 × 10% × (60 ÷ 360)

Bon Firewood sells products to customers at a markup of its original cost. Customers typically pay on account, but large customers are allowed to receive the products and pay the amount owed within 30 days. What type of receivable will Bon Firewood record for these customers? How will the receivable be classified on the balance sheet?

1. Accounts receivable 2. The accounts receivable are shown as a current asset.

ToolBox Co. sells a large piece of equipment to another company on November 6. ToolBox Co. receives a down payment of $1,000 on the date of sale and will receive a $400 monthly payment on the 15th of every month, beginning in January of the following year, for five years. What type of receivable will ToolBox Co. record? Will the receivable be classified as current or noncurrent?

1. Note receivable 2. The $4,800 of monthly payments due within the upcoming year will be classified as a current asset. The remainder will be classified as a noncurrent asset.

A small business records its bad debt expense when a customer is identified as being unable to pay the amount owed. Which method of accounting for uncollectible receivables does the business use?

Direct write-off method

On June 1, Keller Products issues a $5,250 promissory note to Capri Co. in settlement of the company's past due account receivable. The promissory note will be due in 60 days and has a 15% stated interest rate. a. Record the journal entry for the issuance of the note. b. Prepare the journal entry for Keller Products on the due date, assuming that Capri Co. pays the promissory note. Round interest to the nearest whole dollar.

a. Notes Receivable—Capri. Co. Debit $5,250 / Accounts Receivable—Capri Co. (-A) Credit $5,250 b. Cash (+A) Debit $5,381 / Notes Receivable—Capri Co. Credit 5,250 / Interest Revenue Credit $131 **Interest revenue = $5,250 × 15% × (60 ÷ 360)