Ch.7 Acct 2

Which approach for estimating bad debts uses a percentage of each period's net credit sales? The revenue approach The equity approach The income statement approach The balance sheet approach

The income statement approach

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material? allowance method cash method net method direct write-off method

allowance method

Conceptually, the __________ method of recording sales views a discount not taken by the customer as part of sales revenue, whereas the __________ method considers discounts not taken as interest revenue. (Enter one word per blank.)

gross and net

Cobalt Corp. uses the allowance method to account for bad debts. If Cobalt writes off an account for $3,000, what is the effect on the balance sheet? No effect on total assets. A decrease in total assets. An increase in total assets.

No effect on total assets.

The balance sheet approach estimates __________ __________ expense by determining the appropriate carrying value of accounts receivable. (Enter one word per blank.)

bad debt

A trade discount is a reduction from the list price, which is to (Select all that apply.) -give quantity discounts to customers. -disguise real prices from competitors. -change prices without publishing a new catalog. -encourage customers to pay quickly. -reduce the sale price for interest received.

-give quantity discounts to customers. -disguise real prices from competitors. -change prices without publishing a new catalog.

The direct write-off method is a commonly used method for financial reporting purposes is not allowed for income taxes purposes could result in a mismatching of expenses and revenue

could result in a mismatching of expenses and revenue

Which of the following is a contra account to accounts receivable? Allowance for sales returns Inventory-estimated returns Sales returns

Allowance for sales returns

When the amount of bad debts is material, GAAP requires the _____________ method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received. (Enter only one word.)

allowance

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a(n) ___________ discount. (Enter only one word.)

sales

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a(n) _____________ discount. (Enter only one word.)

sales

For accounts receivable, the longer an account is outstanding, the better the customer. the higher probability of it being collected. the more likely it will prove uncollectible. the more likely the customer will return.

the more likely it will prove uncollectible.

A(n) _________ discount is a way to change prices without publishing a new catalog. (Enter only one word.)

trade

Failing to estimate sales returns can result in income being _______ in the period the sale is made and _______ in the period the product is returned. overstated; understated overstated; overstated understated; overstated understated; understated

overstated; understated

The gross method and the net method are two ways to record ____________ discounts. (Enter only one word.)

sales

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period? trade discount purchase discount quantity discount sales discount

sales discount

When a customer returns a product for a refund, in which account is the entry recorded? sales discount sales return purchase discount purchase return

sales return

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _________ __________. (Enter one word per blank.)

sales return

True or false: Inventory that is expected to be returned in the future is included on the balance sheet of the company expecting the return.

True

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet? A payable A transaction A receivable A guarantee

A receivable

What does a sales discount represent? A quantity discount for large customers. A reduction in the selling price of a good or service. A reduction in the amount to be paid if paid within a specified period of time.

A reduction in the amount to be paid if paid within a specified period of time.

The following summarizes the results of an aging analysis of Glenview Company's accounts receivable at the end of the year. Age GroupAmount Estimated Percent Uncollectible EstimatedAllowance 0-30 days $420,000 2% $8,400 31-60 days 140,000 5% 7,000 61-120 days 100,000 10% 10,000 Over 120 days 120,000 20% 24,000 Allowance for uncollectible accounts $49,400 The company has a pre-adjustment credit balance of $5,000 in its Allowance for Uncollectible Accounts at December 31, Year 2. Using the balance sheet approach, what amount of Bad Debt Expense should Glenview report for Year 2?

Bad debt expense= $44,400 Bad debt expense= (Allowance for uncollectible accounts - pre-adjustment credit balance) = ($49,400-5,000)

Which of the following is NOT true about accounting for merchandise returns? a) By the end of the accounting period, a refund liability is established for the amount of returns that the company estimates will occur in the future. b) The refund liability is credited when a customer makes a return c) Returned inventory also must be accounted for when considering sales returns. d) Accounting for sales returns ensures that net revenue excludes sales of goods that are expected to be returned.

b) The refund liability is credited when a customer makes a return

Under the allowance method, when is bad debt expense recognized? when the customer owing money goes out of business when the account is written off when the allowance is created

when the allowance is created

What happens when a receivable previously written off is collected in full? Reinstate the receivable and the allowance for uncollectible accounts. Increase the revenue account for the amount of collection. Reduce the amount of bad debt expense by crediting the account.

Reinstate the receivable and the allowance for uncollectible accounts.

What happens when a receivable previously written off is collected in full? Reinstate the receivable and the allowance for uncollectible accounts. Reduce the amount of bad debt expense by crediting the account. Increase the revenue account for the amount of collection.

Reinstate the receivable and the allowance for uncollectible accounts.

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _____ method of accounting for bad debts. allowance direct write-off gross discount

allowance

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account? bad debt expense sales discounts accounts receivable allowance for sales returns

allowance for sales returns

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account? bad debt expense gross accounts receivable allowance for uncollectible accounts net income

allowance for uncollectible accounts

To record bad debts at the end of the period, an adjustment would be made by a credit to allowance for uncollectible accounts. sales returns and allowances. bad debt expense. accounts receivable.

allowance for uncollectible accounts.

An allowance for sales return account is classified as a(n) contra account to inventory. contra account to sales revenue. other comprehensive income. owners' equity account.

contra account to inventory.

Tom Company offers Jane Company discount terms of 5/15, n/45. What does this mean? -Jane Company will receive a 15% discount if payment is made within 5 days. -Jane Company will receive a 5% discount if payment is made within 45 days. -Jane Company must pay the full amount if payment is made after day 15. -Jane Company must pay the full amount if payment is made before day 15.

-Jane Company must pay the full amount if payment is made after day 15.

At what amount are accounts receivable initially recorded? -The present value of expected future cash flows. -The exchange price agreed on by the buyer and seller. -The future value of the amount expected to be collected.

-The exchange price agreed on by the buyer and seller.

Manning Company uses the allowance method. At the end of its first year of operations, the company estimates that it will not collect $2,500 of its accounts receivable. Prepare the appropriate adjusting journal entry to establish the estimate for uncollectible accounts. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Bad debt expense : D 2,500 Allowance for uncollectible accounts : CR 2,500

Rode Company estimates bad debt expense at 1% of credit sales. The company reported accounts receivable of $100,000 and a pre-adjustment credit balance in its allowance for uncollectible accounts account of $2,000 at the end of the current year. During the current year, Rode's credit sales were $2,000,000. What is the amount of the company's bad debt expense for the current year?

Bad debt expense = 20000 Bad debt expense = (Credit sales*Percent of credit sales uncollectible) = 2000000*1%

True or false: The possibility of damaged or defective merchandise is included in a company's estimate of returns.

True

Joyce determines that a customer account of $20,000 should be written off as uncollectible. The journal entry to write off the account using the allowance method will include which of the following entries? (Select all that apply.) credit to accounts receivable debit bad debt expense debit to allowance for uncollectible accounts credit allowance for uncollectible accounts

credit to accounts receivable debit to allowance for uncollectible accounts

Receivables represent a company's claims to the future collection of (Select all that apply.) other liabilities services cash other assets

services cash other assets

At the end of its first year of operations, Loring Industries estimates that sales returns in the amount of $20,000 will occur during Year 2. The cost of the inventory expected to be returned is $12,000. All of Loring's sales are made for cash and the company uses a perpetual inventory system. Assume that no returns have occurred as of the end of Year 1. Prepare the appropriate adjusting journal entry to record the expected sales returns and the inventory expected to be returned in Year 2. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Sales returns : D 20,000 Refund liability : CR 20,000 Inventory - estimated returns : D 12,000 Cost of goods sold : CR 12,000

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2021. The note, along with interest at 6%, is due on June 30, 2022. On September 30, 2021, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank? a) $40,600. b) $36,000. c) $39,220. d) $36,820.

c) $39,220.

Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2022 to satisfy the obligation in full.If Frasquita accrued interest of $15,000 on the note in its 2021 year-end financial statements, what amount would it have recorded the equipment for on 6/30/2021? a) $500,000. b) $515,000. c) $550,000. d) $525,000.

d) $525,000.

How do sellers typically account for returns? (Select all that apply.) -As returns occur. -Using an adjusting entry at the end of the period for any remaining future expected returns. -Using an estimate every time they make a sale.

-As returns occur. -Using an adjusting entry at the end of the period for any remaining future expected returns.

When a previously written off account is collected, what happens after the reinstatement? -Collection is recorded with a credit to cash and a debit to accounts receivable. -Collection is recorded with a debit to cash and a credit to accounts receivable. -Collection is recorded with a debit to cash and a credit to allowance for uncollectible accounts. -Collection is recorded with a debit to allowance for uncollectible accounts and a credit to accounts receivable.

-Collection is recorded with a debit to cash and a credit to accounts receivable.

Company A offers Company B discount terms of 2/10, n/30. What does this mean? -Company B will receive a 2% discount if payment is made within 30 days. -Company B will receive a 2% discount if payment is made within 10 days. -Company B will receive a 10% discount if payment is made within 2 days. -Company B will receive a 10% discount if payment is made within 30 days.

-Company B will receive a 2% discount if payment is made within 10 days.

The difference between the gross method and net method of recording sales revenue, in terms of the effect on income is what? -The net method results in a smaller sales value resulting in a smaller net sales revenue value. -There is no difference. -The timing of the recognition of any discounts not taken varies and could occur in different reporting periods. -The gross method results in a greater sales value resulting in a greater net sales revenue value.

-The timing of the recognition of any discounts not taken varies and could occur in different reporting periods.

When does the actual write-off of a receivable occur? -When payment is not made within the payment terms agreed upon by the buyer and seller. -When payment is still outstanding at the end of the reporting period. -When it is determined that all or a portion of the receivable will not be collected.

-When it is determined that all or a portion of the receivable will not be collected.

A trade discount is -a percentage reduction from list price. -a rebate from the manufacturer. -a percentage reduction of the amount due for early payment. -an increase in the account receivable.

-a percentage reduction from list price.

When initially recorded, the typical accounts receivable is valued at the -present value of expected cash flows. -future value of cash flows. -sales amount less expected warranty expense. -amount expected to be received.

-amount expected to be received.

An account receivable is normally classified as a -current liability. -noncurrent liability. -noncurrent asset. -current asset.

-current asset.

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a -debit to Bad Debt Expense for $4,000. -credit to Allowance for Uncollectible Accounts for $4,000. -debit to Bad Debt Expense for $2,000. -credit to Accounts Receivable for $2,000. -credit to Bad Debt Expense for $2,000. -debit to Allowance for Uncollectible Accounts for $2,000.

-debit to Bad Debt Expense for $2,000.

Accounts receivable are classified as current assets because -they accrue interest at a specified interest rate. -they are matched with accounts payable for the period. -they will be converted to cash within 1 year or the normal operating cycle. -they are a formal agreement to pay within a specific period of time.

-they will be converted to cash within 1 year or the normal operating cycle.

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet? A transaction A payable A guarantee A receivable

A receivable

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry? Adjustment for sales returns that occurred. Sale of of goods on account to a customer. Returned inventory purchased to the supplier. Adjustment for delinquent account of customer.

Adjustment for sales returns that occurred.

When a specific account receivable is determined to be uncollectible, which of the following occur? (Select all that apply.) Allowance account is reduced Sales revenue is recognized Bad debt expense is recognized Account receivable is reduced

Allowance account is reduced Account receivable is reduced

When an account previously written off is collected in full, the entry to reinstate the account would require which of the following? (Select all that apply.) Debit Bad Debt Expense. Credit Allowance for Uncollectible Accounts. Credit Accounts Receivable. Debit Accounts Receivable.

Credit Allowance for Uncollectible Accounts. Debit Accounts Receivable.

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15? (Select all that apply.) Credit to Accounts Receivable. Debit to Sales Expense. Debit to Sales Returns. Credit to Allowance for Sales Returns.

Credit to Accounts Receivable. Debit to Sales Returns.

A company believes its sales returns will be material. What is the journal entry required? Debit allowance for sales returns; credit accounts receivable. Debit sales returns; credit allowance for sales returns. Debit allowance for sales returns; credit sales returns. Debit accounts receivable; credit allowance for sales returns.

Debit sales returns; credit allowance for sales returns.

When actual inventory returns occur in a perpetual inventory system, which of the following happens? Debit the allowance for sales returns account Credit the asset inventory account Debit the asset inventory account

Debit the asset inventory account

Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise and receives a refund. As of May 15, the customer has paid for all of the goods with cash. What will Adrian record on May 15? (Select all that apply.) Debit to Sales Expense. Credit to Allowance for Sales Returns. Debit to Sales Returns. Credit to Cash.

Debit to Sales Returns. Credit to Cash.

True or false: Most sellers estimate returns every time they make a sale.

False

Glaser Corp. does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned January 15, year 2, what is the effect on its financial statements? Year 1 total assets are understated. Year 2 total assets are overstated. Year 1 net income is overstated. Year 2 net income is overstated.

Year 1 net income is overstated.

Enchill Company accrues bad debt expense during the year at an amount equal to 3% of credit sales. At the end of the year, a journal entry adjusts the allowance for uncollectible accounts to a desired amount based on an aging of accounts receivable. At the beginning of 2018, the allowance account had a credit balance of $18,000. During 2018, credit sales totaled $480,000 and receivables of $14,000 were written off. The year-end aging indicated that a $21,000 allowance for uncollectible accounts was required. Enchill's bad debt expense for 2018 would be: a) $17,000 b) $2,600 c) $21,000 d) $14,400

a) $17,000

Which of the following items are classified as receivables? (Select all that apply.) amounts owed by customers amounts due suppliers amounts paid for expenses tax refund claims amounts loaned and expected to be repaid

amounts owed by customers tax refund claims amounts loaned and expected to be repaid

The balance sheet approach to measuring bad debt expense focuses on ratio of accounts receivable to sales. cash flows from sales. appropriate carrying value of accounts receivable.

appropriate carrying value of accounts receivable.

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as net accounts receivable. sales allowances. accounts receivable expense. bad debt expense.

bad debt expense.

Frasquita acquired equipment from the manufacturer on 6/30/2021 and gave a noninterest-bearing note in exchange. Frasquita is obligated to pay $550,000 on 4/30/2022 to satisfy the obligation in full.If Frasquita accrued interest of $15,000 on the note in its 2021 year-end financial statements, what would the manufacturer record in its 2021 income statement for this transaction? a) $15,000 of interest revenue. b) $25,000 of interest revenue. c) $15,000 of interest revenue and $525,000 of sales revenue. d) $550,000 of sales revenue.

c) $15,000 of interest revenue and $525,000 of sales revenue.

Jasper Company uses the allowance method to account for bad debts. During 2018, the company recorded bad debt expense of $9,000 and wrote off as uncollectible accounts receivable totaling $5,000. These transactions caused a decrease in working capital (current assets minus current liabilities) of: a) $7,000 b) $5,000 c) $9,000 d) $14,000

c) $9,000

Allister Company does not use the allowance method to account for bad debts and instead any bad debts that do arise are written off as bad debt expense. What problem might this create if bad debts are material? a) Receivables likely will be understated. b) No problems are created. c)Receivables likely will be overstated. d) The matching principle is violated when the write-off occurs in the same period that the receivable is initially recorded.

c)Receivables likely will be overstated.

Shannon Corp. determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include (Select all that apply.) debit to Bad Debt Expense. debit to Accounts Receivable. credit to Sales Returns and Allowances. credit to Accounts Receivable debit to Allowance for Uncollectible Accounts.

credit to Accounts Receivable debit to Allowance for Uncollectible Accounts.

Planters Corp. has an account that was written off in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require (Select all that apply.) credit to Accounts Receivable. credit to Allowance for Uncollectible Accounts. debit to Bad Debt Expense. debit to Accounts Receivable. debit to Sales Returns and Allowances.

credit to Allowance for Uncollectible Accounts. debit to Accounts Receivable.

Paredes uses the gross method to record sales on account. Paredes sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to sales, $1,000. credit to accounts receivable, $1,000. credit to accounts receivable, $980. debit to accounts receivable, $980. credit to sales, $980. debit to accounts receivable, $1,000.

credit to sales, $1,000. debit to accounts receivable, $1,000.

The income statement approach for estimating bad debts focuses on end-of-year accounts receivable. total sales. average accounts receivable. current year's credit sales.

current year's credit sales.

The Reingold Hat Company uses the allowance method to account for bad debts. During 2018, the company recorded $800,000 in credit sales. At the end of 2018, account balances were: Accounts receivable, $120,000; Allowance for uncollectible accounts, $3,000 (credit). If bad debt expense is estimated to be 3% of credit sales, the appropriate adjusting entry will include a debit to bad debt expense of: a) Zero. b) $27,000 c) $21,000 d) $24,000

d) $24,000

Trell Corporation transferred $50,000 of accounts receivable to a local bank. The transfer was made without recourse. The local bank remits 80% of the factored amount to Trell and retains the remaining 20%. When the bank collects the receivables, it will remit to Trell the retained amount less a fee equal to 3% of the total amount factored. Trell estimates a fair value of its 20% interest in the receivables of $8,000 (not including the 3% fee). Trell will show an amount receivable from factor of: a) $10,000. b) $8,500. c) $8,000. d) $6,500.

d) $6,500.

The CECL model: a) Is a good example of an income-statement approach to estimating bad debts. b) Considers historical experience but not forecasts of the future. c) Recognizes bad debts when it is probable that an economic sacrifice has occurred. d) Allows a company to use an accounts receivable aging as part of its methodology for estimating credit losses.

d) Allows a company to use an accounts receivable aging as part of its methodology for estimating credit losses.

Tim Corporation uses the net method to record sales on account. Tim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to accounts receivable, $4,900. credit to sales, $5,000. debit to accounts receivable, $5,000. debit to accounts receivable, $4,900. debit to sales, $5,000. credit to sales, $4,900.

debit to accounts receivable, $4,900. credit to sales, $4,900.

Kim Corp. uses the gross method to record sales on account. Kim sells goods on account for $5,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) debit to accounts receivable, $5,000. debit to accounts receivable, $4,900. credit to sales, $5,000. debit to sales, $5,000. credit to accounts receivable, $4,900. credit to sales, $4,900.

debit to accounts receivable, $5,000. credit to sales, $5,000.

Kilroy uses the net method to record sales on account. Kilroy sells goods on account for $1,000 with terms 2/10, n/30. The journal entry to record this transaction will include (Select all that apply.) credit to accounts receivable, $980. debit to accounts receivable, $980. debit to accounts receivable, $1,000. debit to sales, $1,000. credit to sales, $1,000. credit to sales, $980.

debit to accounts receivable, $980. credit to sales, $980.

The two methods used for recording sales discounts are the _________ method and the __________ method. (Enter only one word per blank.)

gross and net

The ____ of recording sales revenue recognizes the discount not taken as a part of the sale. trade method net method gross method

gross method

Under the gross method, the initial recording of sales revenue will be ______ the amount recorded under the net method. lower than equal to higher than

higher than

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) _________ __________ approach to measuring bad debts. (Enter one word per blank.)

income statement

The direct write-off method is required for income tax purposes. IFRS reporting purposes. U.S. GAAP reporting purposes.

income tax purposes.

The possibility of damaged or defective merchandise _______ a company's estimate of returns. increases has no effect on decrease

increases

An aging schedule classifies accounts receivable based on customer credit rating. size of customer purchase. length of time outstanding. past experience with customer.

length of time outstanding.

The income statement approach for estimating bad debts uses a percentage of net credit sales. net accounts receivable. allowance for uncollectible accounts. credit sales plus cash sales.

net credit sales.

The direct write-off method is used when uncollectible accounts are not anticipated or are immaterial. a company elects to use this method as one of several alternatives. bad debts are expected to be material in amount. the company expects excessive sales returns.

uncollectible accounts are not anticipated or are immaterial.

When the direct write-off method is used, an entry for bad debt expense is required only when bad debts are recorded on the tax return. at the end of the year. when the account receivable is determined to be uncollectible. when each sale is made.

when the account receivable is determined to be uncollectible.