Chapt5 Accounting
notes receivable
similar to accounts receivable but include a formal written debt agreement - classified as either current or noncurrent asset depending on due date
The percentage-of-receivables method of estimating bad debt applies ____ to _____.
single percentage; AR
allowance method
some accounts receivable will not be collected - companies are required to: - estimate future uncollectible accounts - record estimates in the current year
Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?
18000 20000-2000
Average collection period
365 days/ receivable turnover ratio
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?
Make an adjusting entry at the end of the current period to accrue the interest earned.
recording notes receivable: •Kimzey provided $10,000 of services to Justin Payne, who is not able to pay immediately •Justin Payne signs a promissory note, offering to pay $10,000 plus 12% interest in six months (August 1).
NR.... 10,000 Serv Rev.....10000 (6 mo, 12% NR)
receivables turnover ratio
Net credit sales / average account receivables
when are accounts receivable recorded?
at the time of sale or service
record collection of note: On May 1, 2019, the maturity date, Kimzey collects the note of $10,000 and the interest of $600.
cash .. 10,600 NRec .... 10,000 I. Rec .... 200 (accured) I. Rev .... 400
recording sales discount: •Offer a customer a reduction if payment is made within a specified period of time •Link's Dental offers Dee terms of 2/10, n/30 on $350 owed; Dee pays on March 10 (w/in 10 days)
cash .. 343 sales dis.. 7 accoun rev .. 350 (2% of sales discount= 350x
Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.
estimated; at the end of the year
Percentage of credit sales method
estimates uncollectible accounts based on % of credit sales - AKA "income statement method" - adjusts the allowance for uncollectible accounts for current year's credit sales that we don't expect to collect
notes receivable
formal credit arrangements evidenced by written debt instruments (or "notes")
under the allowance method, companies are required to estimate __________ and record those estimates in the _________.
future uncollectible accounts; current year
calculating interest
interest = face value x annual IR x fraction of the year
the quicker a company can collect its receivables
the more quickly it can use that cash to generate even more cash
the difference between the different methods for uncollectible accounts is
timing
writing off AR
when it becomes clear the customer will not pay, the company writes off the customer's account balance as uncollectible -negative effects of BD already recorded, adjusting entry at the end of the previous year
Direct write off method
write off bad debts only at the time they actually become uncollectible - requires estimation of uncollectible accounts before they even occur Used: - when uncollectible accounts are not anticipated - tax reporting
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
Recording Credit sales
debit acct rec, credit serv rev
recording uncollectible accounts : At the end of 2018, Kimzey is owed $20 million from customers and estimates that 30% will not be collected.
- BDE ... 6 - Allowance for uncollectible accounts .. 6 (20 x .3) = 6
what do the recievable turnover ratio and average colleciton period indicate
a management's ability to collect cash from customers in a timely manner
direct write-off method reduces
accounts receivables and records bad debt expense at the time the AR proves uncollectible.
most accurate method for estimating uncollectible goods
aging method
recording write off: •Kimzey receives notice that Bruce Easley has filed for bankruptcy and will not pay $4,000 •Kimzey writes off Bruce's account receivable
allowance for uncollectible accounts .. 4000 AR ..................4000
Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______.
cash; AR
sales allowance
customer does not return a product - seller issues a cash refund if original sale was for cash - seller reduces balance of accounts receivable if orginal sale was on account
sales return
customer returns a product - seller issues a cash refund if the original sale was for cash - seller reduces balance of accounts recievable if original sale was on account
recording collection of accounts previously written off
deb AR cred AFUA deb cash cred AR
Recording Trade Discount
debit acct rec credit serv revenue (take the % off before putting it down)
Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):
decrease in AR
The financial statement effects of recording an allowance for estimated sales returns are that: (Select all that apply.)
net income decrease, asset decrease, equity decrease
we recognize accounts receivable as assets in their _______
net realizable value, amount of cash we expect
does write-offs have an effect on total assets or total expenses
no, write offs do not have an affect on total assets (balance sheet) or total expenses (income statement)
estimated uncollectible accounts
(apart of allowance method) reduce assets (AR) Increase expenses (BDE)
Percentage of receivables method
-Estimates uncollectible accounts - bases the estimate of BD on a balance sheet amount - AR - AKA "Balance sheet method"
Credit Sales
-Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. -AKA sales on account or service on account - common for many business transactions
Accounts Receivable
-cash owed to the company by its customers from sales or services on account - recorded at the time of the sale or service -AKA trade receivables
The write-off involves:
-decreasing a contra asset (Allowance for uncollectible accounts) - decreasing an asset (AR) - net effect on total assets is zero
aging method
-estimates uncollectible accounts - considers the age of receivables - older accounts less likely to be paid - more accurate than using single percentage
write offs:
-reduce the balance of AR - reduce balance of allowance for uncollectible accounts
Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?
93,000
Following Year in Allowance method
Allowance method allows for the BD to be over estimated or underestimated. in the year end Adj Ent: must connect the ending balance to with the write-offs and such
When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?
An entry to reinstate the account receivable and an entry to record payment.
True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.
F: Receivables not expected to be collected are not included in assets
recorded accrued interest •On December 31, 2018, Kimzey accrues interest for note receivable accepted on November 1, 2018.
IRec... 200 IRev ... 200 (10,000 x 12% x 2/12)
With the allowance method, bad debt expense is recorded
at the end of the period when bad debts are estimated
Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.
contra asset
The account "Allowance for Uncollectible Accounts" is classified as
contra asset to AR
sales allowance and sales returns are
contra revenue accounts - reported with total rev in the income statement but with negative balances
The account "Allowance for Uncollectible Accounts" normally has a _______ balance
credit
When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?
debit for AR credit allowance for uncollectible
uncollectible accounts have a ______ balance
normal credit
contra revenue account
normal debit balances and reduce the net income - represent reduction of revenues
nontrade receivables
receivables that originate from sources other thank customers - tax refund claims, interest receivable, and loans
Trade discount
reduction in list price of a product or service - used to provide incentives to larger customers or certain consumer groups (seniors, military)
Recording sales allowance : •After getting her teeth whited on March 1, Dee notifies Dr. Link on March 5 that another dentist is offering the same procedure for $350 •Dr. Link reduces Dee's account balance by $50
sales allowance -- 50, accounts receivable -- 50
