Chapter 7 Accounting
True or false: A note is honored when it is paid in full.
True
Bad debts are:
accounts of customers who do not pay. an expense of selling on credit. also called uncollectible accounts.
When a note's maker is unable or refuses to pay at maturity, the note is considered BLANK
dishonored
The expected proceeds from accounts receivable, determined by taking accounts receivable less the allowance for doubtful accounts, is called:
realizable value
A BLANK is an amount due from another party.
receivable
The allowance for doubtful accounts is a contra asset account that equals:
total uncollectible accounts
The BLANK method of estimating bad debts uses both past and current receivables information to estimate the allowance amount. Specifically, each receivable is classified by how long it is past its due date.
aging of receivables
Leo Co. uses the allowance method to account for bad debts. At the end of 2010, Leo Co.'s accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (credit); and sales of $500,000. Based on history, Leo estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:
$25,000 x 2% = $500 desired ending balance in the allowance account. Subtract the beginning credit balance to determine the amount of the adjusting entry. $500 - $100 = $400.
The following financial information is available for Siu Co. 2010 Net Sales 160,000 Accounts Receivable 38,000 2009 Net Sales 155,000 Accounts Recivable 32,000 Compute accounts receivable turnover for 2010. Round your answer to one decimal place.
160,000/ ((38,000+32,000)/2) 4.6
Net sales for a company are $250,000. Average accounts receivable are $10,000. The accounts receivable turnover for this company is BLANK
25
To record a sale on account, the company should debit:
Accounts Receivable.
To record a customer's check in full payment for a sale that was made the prior month, the company should debit the BLANK account.
Cash
T. Hillcrest Co. sold $500 of merchandise on a bank credit card less a 5% fee. The entry to record this sales transaction would include debit(s) to:
Cash for $475 and Credit Card Expense for $25
Tricon Co. sells $10,000 of its accounts receivables and is charged a 5% factoring fee. It records this sale with a debit to:
Cash for $9,500.
JD Co. had $1,000 of credit cards sales. The net cash receipts were deposited immediately into JD Company's bank account less a 3% fee. The entry to record this sales transaction would include the following debit entries.
Cash for $970 Credit Card Expense for $30
Kaiven Company accepted a $12,000, 60-day, 6% note on December 21 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 would include a debit to:
Cash in the amount of $10,100
On January 1, JC Co. accepted a 60-day, 6%, note in the amount of $10,000 from a customer. On March 2, the due date of the note, the customer honors the note and pays in full. The journal entry that JC would make to record the receipt of payment of this note would include a debit to:
Cash in the amount of $10,100
True or false: When the maker of a note pays at maturity, the note is said to be dishonored.
False
True/ False: The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts.
False
The principal and interest of a note are due on its maturity date. The maker of the note usually (makes/honors/dishonors) the note and pays it in full.
Honors
Kaiven Company accepted a $12,000, 60-day, 6% note on December 21 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 would include a debit to:
Interest Receivable for $20.
On March 14, Teal Co. accepted a 120-day, 6% note in the amount of $10,000 from AZC Co., a customer. On the due date of the note, AZC honors the note and pays in full. The journal entry that Teal would make to record payment of this note would include a credit to:
Interest Revenue for $200.
Lion Company accepted a $15,000, 30-day, 6% note on December 16 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 for Lion Company would include a credit to:
Interest Revenue for $37.50.
The (maker/signer) of the note is the one that signed the note and promised to pay at maturity. The (maker/payee) of the note is the person to whom the note is payable.
Maker Payee
On December 1, Christy Co. accepted a 60-day, 6%, $1,000 note due January 30. On December 31, the appropriate year-end adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 (assuming no reversing entry was made) would include a credit to:
Notes Receivable for $1,000. Interest Receivable for $5. Interest Revenue for $5.
On November 1, Alice Co. accepted a 90-day, 6%, $2,000 note due January 30. On 12/31, the appropriate adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 would include a credit to:
Notes Receivable for $2,000 Interest Receivable for $20. Interest Revenue for $10.
Dea Company sold $1,000 of merchandise to a customer who used Dea Company's credit card. The entry to record this transaction on the date of the sale would include:
Sales in the amount of $1,000. Accounts Receivable in the amount of $1,000.
To compute interest due on a maturity date, you should multiply which of the following factors?
Time expressed in fraction of year Interest rate Principal
True or false: The two methods companies can use to convert receivables to cash before they are due includes selling them and pledging them.
True
At period end, Bradon Company estimates that $1,200 of its accounts receivable balance is uncollectible. Bradon uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a (debit/credit) to Allowance for Doubtful Accounts.
credit
On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 account. Eli's journal entry to record this transaction on November 1, would include a:
credit to Accounts Receivable for $6,000. debit to Notes Receivable for $6,000.
On March 14, Ian Co. accepted a 180-day, 5% note in the amount of $1,000 from Ali Co., a customer. On the due date of the note, Ali dishonors the note and fails to pay. The journal entry that Ian would record on the due date would include a:
credit to Notes Receivable for $1,000. debit to Accounts Receivable - Ali for $1,025. credit to Interest Revenue for $25.
The BLANK method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expense.
direct write off
The direct write-off method records bad debts expense only when an account becomes uncollectible, which is not always in the same period as the sale. For this reason, the direct write-off method violates the BLANK BLANK principle
expense or matching recognition
The direct write-off method records bad debts expense only when an account becomes uncollectible, which is not always in the same period as the sale. For this reason, the direct write-off method violates the BLANK principle.
expense recognition
Companies sometimes convert receivables to cash before they are due. When a company sells its receivables, it is called (pledging/factoring). When a company uses receivables as collateral for a bank loan, it is called (pledging/factoring).
factoring or factor pledging or pledge
Avi Co. raises cash by borrowing $10,000 and pledging $12,000 accounts receivables as security for the loan. To comply with the full disclosure principle, Avi will record a journal entry in the amount of the $10,000 note payable, and also record a (debit/credit/footnote) to the financial statements, indicating that $12,000 of accounts receivables have been pledged.
footnote
BLANK constraint permits the use of the direct write-off method when bad debts expenses are very small in relation to a company's other financial statement items, such as sales and net income.
materiality
The BLANK constraint permits the use of the direct write-off method when bad debts expenses are very small in relation to a company's other financial statement items, such as sales and net income.
materiality
Conroy Company uses the allowance method to account for bad debts. During 2010, Conroy determined that a balance of $200 for Alegia Co. was uncollectible and wrote the balance off. What is the total decrease to net income related to this entry?
$0
Ana Co. uses the allowance method to account for bad debts. At the end of the period, Ana's unadjusted trial balance shows an accounts receivable balance of $40,000; allowance for doubtful accounts balance of $300 (credit); and sales of $500,000. Based on history, Ana estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of:
$40,000 x 2%= 800-300= $500
Lani Co. uses the allowance method to account for bad debts. At the end of 2010, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:
$400,000 x 1% = 4,000 + 400 = $4,400 Answer: $4,400
Finish Co. uses the allowance method to account for bad debts. At the end of 2010, Finish Co.'s unadjusted trial balance shows an accounts receivable balance of $30,000; allowance for doubtful accounts balance of $200 (credit); and sales of $600,000. Based on history, Finish estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:
$600,000 x 1%=$6,000. When the allowance method is based on sales, the prior balance in the Allowance for Doubtful Accounts account is not taken into consideration. Answer: $6,000
Flash Co. uses the allowance method to account for bad debts. At the end of 2010, Flash Co.'s unadjusted trial balance shows an accounts receivable balance of $45,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,500,000. Based on history, Flash estimates that bad debts will be 0.5% of sales. The entry to record estimated bad debts will include an debit to Bad Debts Expense in the amount of:
$7,500
1. Accounts Receivable 2. Notes Receivable 3. Receivable
1. Amounts due from customers for credit sales 2. An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates 3. Amount due from another party
A 90-day note is signed on October 21. The due date of the note is:
90 days = 31-21=10 days in October + 30 days in November + 31 days in December + 19 days in January. Always start with the number of days in the first month and subtract the date of the note. (October: 31-21 = 10). January 19
Thomas Co. sold $1,000 worth of merchandise on a bank credit card less a 3% fee. The entry to record the sales transaction would include a debit to Cash in the amount of $.
970
The two most common receivables are BLANK receivables and BLANK receivables.
Accounts Notes
Ace Company sells merchandise to a customer in the amount of $200 on credit, terms n/30. The entry to record this sale would include a debit to the BLANK account:
Accounts Receivable
In July, Lane Co. sells merchandise to Avery Co. on account. In August, Avery pays the balance in full. The entry that Lane will make to record the receipt of cash will include a credit to the BLANK account.
Accounts Receivable
On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to:
Accounts Receivable for $3,025
Simon Co. sold $500 of merchandise on their own store credit cards. The entry to record this sales transaction on the date of the sale would include a debit to:
Accounts Receivable for $500
At year-end, Avis Company estimates that $2,000 of its accounts receivable balance is uncollectible. Avis uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a credit to:
Allowance for Doubtful Accounts
Avia Company determines that a customer balance of $400 from Allia, Inc. is uncollectible. Avia uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a debit to:
Allowance for Doubtful Accounts
On December 31, Lee Company estimates that $1,000 of its accounts receivable balance is uncollectible. Lee Company uses the allowance method to account for bad debts. The adjusting entry to record this estimate will include a credit to:
Allowance for Doubtful Accounts
(Bad/Invalid) (collectible/debts) are accounts of customers who do not pay what they have promised to pay. It's considered an expense of selling on credit.
Bad Debits
If an account receivable balance previously written off using the direct write-off method is later collected in full, the entry to record the payment must include a credit to:
Bad Debts Expense
On August 1, Hanes Co. determines that it cannot collect $150 from a customer. Hanes uses the direct write-off method. Hanes will record the write-off of this account by debiting:
Bad Debts Expense for $150.
J. Whitlock Co. had $1,000 of credit cards sales. The net cash receipts were deposited immediately into Whitlock's bank account less a 5% fee. The entry to record this sales transaction would include a debit to:
Credit Card Expense in the amount of $50
True or false: The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts.
False
True or false: The direct write-off method of accounting for bad debts matches the estimated loss from uncollectible accounts receivable against the sales they helped produce.
False
A 60-day note is signed on February 15 (and it's not leap year). The due date of the note is:
February 28th - February 15th = 13 days 13 days + 31 days for March = 44 days 60 total days - 44 days = 16 April 16.
DonCo, Inc. sold merchandise on January 14, and accepted a 90-day, 5% promissory note in the amount of $5,000. On January 14, the entry to record this transaction would include a debit to:
Notes Receivable in the amount of $5,000
The advantages of using the allowance method to account for bad debts include which of the following?
Reports accounts receivable balance at net realizable value Matches expenses with related sales
Yates Co. uses the allowance method to account for bad debts. At the end of the period, Yate's unadjusted trial balance shows an accounts receivable balance of $10,000; allowance for doubtful accounts balance of $400 (credit); and sales of $500,000. Based on history, Yates estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of:
Since this is based on a percentage of sales, you should simply multiply $500,000 x .01 = $5,000.
The BLANK ratio is a measure of both the quality and liquidity of accounts receivable; it indicates how often, on average, receivables are received and collected during the period.
accounts receivable turnover
The BLANK of accounts receivable method uses several percentages to estimate the allowance.
aging
The BLANK method, also referred to as balance sheet method, uses balance sheet relations to estimate bad debts—mainly, the relationship between accounts receivable and the allowance account.
aging of accounts receivable
The (allowance/direct write-off) method of accounting for bad debts matches the estimated loss from uncollectible accounts receivables against the sales they helped produce.
allowance
In September, DK Company sells merchandise to Lions Company on credit. In October, Lions Company pays the balance in full. The entry to record the collection of cash by DK Company in October will include a (debit/credit) to Accounts Receivable.
credit
On July 10, Yao Co. collects $740 from Ean, Inc. from a prior credit sale. This entry would be recorded by Yao with a:
debit to Cash. credit to Accounts Receivable.
A. Stine Co. previously wrote off a $200 bad debt from Thorn Co. using the direct write-off method. On October 1, Stine unexpectedly receives a check in the amount of $200 from Thorn Co. The entry to record this receipt of $200 will include a:
debit to Cash. credit to Bad Debts Expense.
Accounts receivable turnover is calculated using the following formula:
net sales/average accounts receivable
The BLANK method of estimating allowance for doubtful accounts is based on the idea that a given percent of a company's credit sales for the period are uncollectible.
percentage of sales
When a company's receivables are used as security for a loan, the company is said to have BLANK its receivables.
pledged
To compute interest due on a maturity date, use the formula:
principal x interest rate x time expressed in fraction of year
A company sells merchandise to a customer on credit. The journal entry to record this transaction would include a debit entry to the Accounts BLANK account.
receivable
An accounts receivable ledger:
records journal entries that affect accounts receivable is a supplementary record to maintain an account for each customer
When an account previously written off is later collected, two journal entries are required. The first journal entry is to BLANK the account, and the second journal entry is to record BLANK of payment.
reinstate receipt
On August 21, Alix Company receives a $2,000, 60-day, 6% note from a customer as payment on her account. How much interest will be due on October 20—the due date?
$2,000 x 6% x 60/360 = $20
On June 30, Nance Company receives a $5,000, 90-day, 4% note from a customer as payment on her account. How much interest will be due on the note's maturity date?
$5,000 x 4% x 90/360 = $50
1. Promissory note 2. Principle 3. Interest 4. Maker 5. Payee 6. Maturity date
1. Written promise to pay a specified amount of money 2. Amount that the signer agrees to pay back, not including interest 3. Charge from using money loaned from one entity to another 4. One who signed the note and promised to pay at maturity 5. The person to whom the note is payable 6. Day that the principal and interest must be paid
Acel Co. uses the allowance method to account for bad debts. Early in 2010, Acel determined that it could not collect $400 from CTR, Inc. and wrote the balance off. On October 21, Acel received a check for $400 from CTR. The entries to record the receipt of cash on October 21 would include a debit to:
Accounts Receivable. Cash.
Iron Company collects cash in full from a customer who purchased merchandise last month on credit. To record the receipt of cash, Iron Company should make the following entries in the general journal.
Credit to Accounts Receivable Debit to Cash
On March 14, Zest Co. accepted a 120-day, 6% note in the amount of $5,000 from AZC Co., a customer. On the due date of the note, AZC dishonors the note and fails to pay. The journal entry that Zest would make to record the failure to pay this note on the due date would include a debit to:
When a note is dishonored, the Accounts Receivable account is debited for the amount of the note plus interest. Interest = $5,000 x .06 x (120/360) = $100. Accounts Receivable - AZC for $5,100
A(n) BLANK is a supplementary record created to maintain a separate account for each customer.
accounts receivable ledger
A(n) ____________ is a supplementary record created to maintain a separate account for each customer.
accounts receivable ledger
Companies allow customers to pay for products using third-party credit cards because:
cash is received from the credit card company faster than from a credit customer. a variety of payment options typically increase sales volume. the seller avoids the risk of customer non-payment. the seller does not have to evaluate customer credit.
The allowance for doubtful accounts is a(n) (current/contra/opposite) asset account and has a normal credit balance.
contra
Zino Company determines that a customer balance of $200,from Hollis Co. is uncollectible. Zino uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a:
debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
P. Jameson Co. sold $500 of merchandise on Master Card credit sales. The net cash receipts from the sale are immediately deposited in the seller's bank account. Master Card charges a 4% fee. The journal entry to record this sales transaction would include a:
debit to Credit Card Expense for $20. debit to Cash for $480. credit to Sales for $500.
Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include:
to reduce risk of nonpayment. to quickly generate cash.
On January 1, Franz Co. accepted a 30-day, 6% note in the amount of $5,000 from Bria Co., a customer. On January 31, the due date of the note, Bria honors the note and pays in full. The journal entry that Franz would make to record payment of this note would include a:
debit to Cash for $5,025. credit to Interest Revenue for $25. credit to Note Receivable for $5,000.
In August, Johns Co.'s account receivable balance was written off using the direct method. In November, Johns pays the balance in full. The journal entry to record the reinstatement of the account receivable must include a credit to the BLANK, BLANK, BLANK account before recording a debit to the Cash account.
Bad Debits Expense
On August 1, Harris Co. determines that it cannot collect $200 from its customer, L. Dash. Harris Co. uses the direct write-off method, so they will record the write-off of this account by debiting:
Bad Debt Expense.
On December 31, DVS Company estimates that $2,500 of its accounts receivable balance is uncollectible. DVS uses the allowance method to account for bad debts. The entry to record this adjusting entry would include a:
debit to Bad Debts Expense for $2,500. credit to Allowance for Doubtful Accounts for $2,500.
On February 15, Symth Co. determines that it cannot collect $500 owed by its customer, A. Winds. Symth records the loss using the direct write-off method. This entry to record the write-off on February 15 would include a:
debit to Bad Debts Expense. credit to Accounts Receivable - A. Winds.