Chapter 8 key terms

net realizable value

the amount of cash the firm expects to collect

maturity value

the amount that is due on the maturity date of a note

What kind of an account (assest, liability, etc) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit

Contra Asset credit balance

The note receivable dishonored is paid on December 30 by the maker, plus interest for 30 days at 9%. What entry should be made to record the receipt of the payment?

-cash $245,427 -Accounts Receivable $243,600 -interest revenue $ 1,827

A frim has consistently adjusted its allowance account at the end of the fiscal year by adding a fixed percent of the period's net sales on account. After seven years, the balance in Allowance for doubtful Accounts has become very large in relationship to the balance in Accounts Receivable. Give two possible explanations.

(1) The percentage rate used is excessive in relationship to the accounts written off as noncollectable; hence, the balance in the allowance is excessive. (2) A substantial volume of old noncollectable accounts is still being carried in the accounts receivable account.

Neptune Company issued a note receivable to Sailfish Company. (a) Who is the payee? (b) What is the title of the account used by Sailfish Company in recording the note?

(a) Sailfish Company (b) Notes Receivable

Accounts Receivable Turnover

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

dishonored note receivable

A note that the maker fails to pay on the due date.

what are the three classifications of receivables?

Accounts Receivable. Notes Receivable. Other Receivable.

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services

Which of the two methods of estimating uncollectible provides for the most accurate estimate of the current net realizable value of the receivables?

An estimate based on analysis of receivables provides the most accurate estimate of the current net realizable value.

Dan's Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its customers in the form of an account receivable. The few customers that are allowed to carry accounts receivable are long-time residents of twin bridges, with a history of doing business at Dan's Hardware. What method of accounting for uncollectible receivables should Dan's Hardware use and why?

Dan's Hardware should use the direct write-off method because it is a small business that has a relatively small number and volume of accounts receivable

The maker of a $240,000, 6%, 90-day note receivable failed to pay the note on the due date of November 30. What accounts should be debited and credited by the payee to record the dishonored note receivable?

Debit Accounts receivable for $243,600, Credit notes Receivable for $240,000, and Credit Interest Revenue for $3,600

After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $673,400, and Allowance for doubtful Accounts has a balance of $11,900. Describe how the accounts receivable and the allowance for doubtful accounts are reported on the balance sheet

The accounts receivable and allowance for doubtful accounts may be reported at a net amount of $661,500 ($673,400 - $11,900) in the current Assests section of the balance sheet. In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet. Alternatively, the accounts receivable may be shown at the gross amount of $673,400 less the amount of the allowance for doubtful accounts of $11,900, thus yield net accounts receivable of $661,500.

If a note provides for payment of principal of $85,000 and interest at the rate of 6%, will the interest amount to $5,100?

The interest will amount to $5,100 only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note

aging the receivables

The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age.

number of days' sales in receivables

The relationship between sales and accounts receivable, computed by dividing the net accounts receivable at the end of the year by the average daily sales.

Notes Receivable

Written promise (as evidenced by a formal instrument) for amounts to be received.

Receivables

amounts due from individuals and companies that are expected to be collected in cash

Bad Debt Expense

an expense account to record losses from extending credit

Allowance for Doubtful Accounts

contra-asset account containing the estimated uncollectible accounts receivable