Chapter 8 learn smart
Place the events in proper sequence putting the first step on top for a 2-year note established in November that pays interest annually.
1. debit notes receivable and credit cash 2. debit interest receivable and credit interest revenue 3. debit cash and credit interest receivable (or interest revenue if not previously recorded) 4. debit cash and credit notes receivable, interest revenue, and interest receivable
Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and credit sales of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______. (Select all that apply.) Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $1,000 Allowance for Doubtful Accounts of $1,050 Bad Debt Expense of $950 Allowance for Doubtful Accounts of $950
Allowance for Doubtful Accounts of $1,000 Bad Debt Expense of $950
Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, the ______. the Bad Debt Expense will equal $90,000 Allowance for Doubtful Accounts will have a $90,000 credit balance Allowance for Doubtful Accounts will have an $89,000 credit balance the Allowance for Doubtful Accounts will have a $91,000 credit balance
Allowance for Doubtful Accounts will have a $90,000 credit balance
The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______. adjusting entry to allow for estimated bad debts net realizable entry to report the amount expected to be collected subsidiary entry to increase a customer's account for credit sales write-off of a specific customer's account
write-off of a specific customer's account
Why is Allowance for Doubtful Accounts credited, instead of Accounts Receivable, when recording the adjusting entry for bad debts? Allowance for Doubtful Accounts is not credited; Accounts Receivable is credited when recording the adjusting entry for bad debts. Allowance for Doubtful Accounts is credited because if Accounts Receivable were credited, the assets would be overstated. Allowance for Doubtful Accounts is credited because if Accounts Receivable were credited, the assets would be understated. Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.
Accounts Receivable consists of many customer accounts and thus cannot be credited unless it is known which specific customer is not going to pay.
If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $9,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of ______.
$1,000 credit
Which method of allowing for estimated uncollectible accounts is generally more accurate? Aging of accounts receivable method Percentage of credit sales method Neither is more accurate than the other
Aging of accounts receivable method
What is the entry a company records at the time it issues a $1,000, 6% note to one of its employees that the employee needs to repay in 6 months? (Select all that apply.) Credit Interest Revenue Debit Notes Receivable Credit Notes Payable Debit Notes Payable Credit Cash Debit Cash
Debit Notes Receivable Credit Cash
True or false: GAAP require end-of-period adjustments for the estimated bad debts in the period of the credit sale even though the specific, non-paying customers have not yet been identified.
True
During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? Write off the uncollectible account and its corresponding allowance from the accounting records. Increase Bad Debt Expense. Nothing, as Bad Debt Expense has already been recorded.
Write off the uncollectible account and its corresponding allowance from the accounting records.
The adjusting entry to record the estimated amount of bad credit sales is a debit to ______ _______ _______and a credit to Allowance for Doubtful Accounts.
bad debt expense
An employee paid a company back for amounts the company lent 3 months earlier. The company would record the collection from the employee by ______. debiting Interest Receivable and Notes Receivable and crediting Cash debiting Cash and crediting Notes Receivable debiting Notes Payable and crediting Cash debiting Cash and crediting Notes Payable
debiting Cash and crediting Notes Receivable
The fees charged by major credit card companies are included in ______. cost of goods sold on the income statement interest expense on the balance sheet cost of goods sold on the balance sheet selling expenses on the income statement selling expense on the balance sheet interest expense on the income statement
selling expenses on the income statement
1. percentage of credit sales 2. aging of accounts receivable 3. direct write off match: uses more detailed data and is more accurate simpler to apply but less accurate not considered an acceptable method under GAAP
simpler to apply but less accurate uses more detailed data and is more accurate not considered an acceptable method under GAAP
Bad Debt Expense is a ______. permanent account so its balance carries forward to the next accounting period temporary account so its balance is closed (zeroed out) at the end of the accounting period temporary account so its balance carries forward to the next accounting period permanent account so its balance is closed (zeroed out) at the end of the accounting period
temporary account so its balance is closed (zeroed out) at the end of the accounting period
The entry to record the issuance of a note receivable is ______. debit Notes Receivable and credit Cash and Interest Revenue debit Cash and Interest Receivable and credit Notes Receivable debit Cash and credit Notes Receivable and Interest Revenue debit Cash and credit Notes Receivable debit Notes Receivable and credit Cash
debit Notes Receivable and credit Cash
A high receivables turnover ratio is a sign of a company's ______. profitability weakness in granting and collecting credit effectiveness in granting and collecting credit
effectiveness in granting and collecting credit
Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet. $100 greater than $100 less than the same as
$100 less than
Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet. $100 less than the same amount as $100 more than
$100 less than
Which of the following is the typical sequence of accounting for sales made on account using the allowance method? Place in order of occurrence from top to bottom.
1. accounts receivable is debited in the period revenue is recognized 2. bad debt expense is estimated and recorded with an adjusting entry 3. specific customer balances are written off
Net sales revenue is $720,000. Beginning and ending net accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio. 12.4 times 11.6 times 8.3 times 12.0 times
12.0 times
Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer? Increased bad debt expense Increased labor costs Additional sales revenue
Additional sales revenue
Which of the following are contra-asset accounts? (Check all that apply.) Deferred Revenue Allowance for Doubtful Accounts Accumulated Depreciation Common Stock
Allowance for Doubtful Accounts Accumulated Depreciation
Which of the following is recorded at the end of an accounting period when accounting for receivables using the allowance method? An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale. The write off of specific customer accounts is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable. The write off of specific customer accounts is recorded by debiting Accounts Receivable and crediting Allowance for Doubtful Accounts. The write off of specific customer accounts is recorded by debiting Allowance for Doubtful Accounts and crediting Bad Debt Expense.
An estimate is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Account in the same period as the related sale.
Which company has the higher receivables turnover ratio? Company A Company B Average Net Accounts Receivable $2,000 $5,000 Average Inventory $4,000 $20,000 Net Sales $40,000 $100,000 Company A's is greater Both are the same Company B is greater
Both are the same
ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy? Credit card companies charge fees that reduce profits. There are no downsides as the credit card company bears all risks and costs. The company has to wait 30 days to collect cash from the credit card companies.
Credit card companies charge fees that reduce profits.
Which of the following are disadvantages to extending credit to customers? (Check all that apply.) Increased bad debt costs Increased credit ratings Increased wage costs Increased sales Delayed receipts of cash
Increased bad debt costs Increased wage costs Delayed receipts of cash
What is occurring if a company is debiting Cash and crediting Notes Receivable? It is collecting the principal on amounts lent earlier. It is borrowing money. It is paying amounts owed on amounts borrowed earlier. It is lending money.
It is collecting the principal on amounts lent earlier.
Which account is used to reduce assets for the amount of estimated bad debts? The contra-revenue account called Allowance for Doubtful Accounts The contra-asset account called Bad Debt Expense The contra-revenue account called Bad Debt Expense The contra-asset account called Allowance for Doubtful Accounts
The contra-asset account called Allowance for Doubtful Accounts
When will a bankrupt customer's accounts receivable be eliminated? When the company records ______. a credit sale to the customer a write off an adjusting entry to allow for doubtful accounts
a write off
Ima Broke is a customer that owes the company for credit sales and has declared bankruptcy. As a result, Ima Broke's subsidiary account receivable will be eliminated when ______. a sale is made on account an adjusting entry is recorded by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable
a write off is recorded by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable
A sale on account is recorded with a debit to ________ ________and a credit to _______ _________.
accounts receivable, sales revenue
The adjusting entry to record the estimated amount of bad credit sales is a debit to Bad Debt Expense and a credit to ____ _____ ____ _____.
allowance for doubtful accounts
Tresses, Inc., which has a December 31 year end, lent $1,000 on December 1 to an employee at 6% due in 6 months. When will Tresses record Interest Revenue? It will record ______. an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December a daily entry with a debit to Interest Receivable and credit to Interest Revenue for each day's interest generated interest earned on the payment date with a debit to Cash and credit to Interest Revenue for the 6 months of interest generated
an adjusting entry on December 31 with a debit to Interest Receivable and credit to Interest Revenue for the interest generated in December
When a company lends money to employees at a rate of 4%, the company will record ______. a liability called Accounts Payable an asset called Notes Receivable an asset called Accounts Receivable a liability called Notes Payable
an asset called Notes Receivable
When a company lends money to employees at a rate of 4%, the company will record ______. an asset called Notes Receivable an asset called Accounts Receivable a liability called Notes Payable a liability called Accounts Payable
an asset called Notes Receivable
Using the allowance method, Bad Debt Expense is recorded _____. when the specific customer is known to be uncollectible as an estimate in the period of the related credit sales when the company defaults on its Notes Payable when a company writes off its uncollectible receivables
as an estimate in the period of the related credit sales
Using the allowance method, Bad Debt Expense is recorded _____. when the specific customer is known to be uncollectible when the company defaults on its Notes Payable as an estimate in the period of the related credit sales when a company writes off its uncollectible receivables
as an estimate in the period of the related credit sales
Allowance for Doubtful Accounts is a(n) ________-asset account and has a normal ______balance.
contra, credit
Match the entry that would be recorded for the 4 key events related to issuing an interest-bearing note. The issuance of a note The adjusting entry to record interest owed The receipt of an interest payment The receipt of the principal payment debit Notes Receivable and credit Cash debit Cash and credit Notes Receivable debit Cash and credit Interest Receivable debit Interest Receivable and credit Interest Revenue
debit Notes Receivable and credit Cash debit Interest Receivable and credit Interest Revenue debit Cash and credit Interest Receivable debit Cash and credit Notes Receivable
Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a ______. (Select all that apply.) Bad Debt Expense will show a negative (or credit) balance of $1,100 debit to Bad Debt Expense of $1,000 debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $1,000 credit to Allowance for Doubtful Accounts of $900 credit to Allowance for Doubtful Accounts of $1,100
debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000
The allowance method is a method of accounting that ______ for estimated bad debts. decreases net accounts receivable increases liabilities increases net income increases net accounts receivable
decreases net accounts receivable
Notes receivable are used for ______. (Check all that apply.) extending payment periods selling large dollar-value items lending money to individuals or businesses purchasing property, plant, and equipment recording bad debt expense
extending payment periods selling large dollar-value items lending money to individuals or businesses
The 2 steps required using the allowance method, are to ______. (Select the 2 that apply.) first write-off specific customer balances first make an end-of-period adjustment to record the estimated bad debts later make an end-of-period adjustment to record the estimated bad debts later write-off specific customer balances when they are known to be uncollectible
first make an end-of-period adjustment to record the estimated bad debts later write-off specific customer balances when they are known to be uncollectible
Notes Receivable differ from Accounts Receivable in that Notes Receivable ______. do not have to be created for every new transaction, so they are used more frequently are noncurrent assets generally charge the borrowers interest from the day they are signed to the day they are collected
generally charge the borrowers interest from the day they are signed to the day they are collected
Bad Debt Expense ______. (Check all that apply.) is a cost of extending credit to customers is an estimate is based on actual events and does not require estimation should exceed the revenue generated from incurring the cost
is a cost of extending credit to customers is an estimate
Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, Bad Debt Expense on the income statement will be ______ the Allowance for Doubtful Accounts on the balance sheet. less than the same as greater than
less than
When accounting for accounts receivable, a primary objective is to ______. not understate liabilities and overstate stockholders' equity for the amounts not yet collected understate stockholders' equity for estimated uncollectible receivables understate assets and stockholders' equity for sales that have been collected not overstate assets and stockholders' equity by the estimated amount of bad debt
not overstate assets and stockholders' equity by the estimated amount of bad debt
Failing to record bad debt expense in the same period as the related revenue violates which principle? Lower-of-cost-or-market value principle Expense recognition (matching) principle Revenue recognition principle
Expense recognition (matching) principle
True or false: The adjusting entry to record Bad Debt Expense includes a credit to Accounts Receivable.
False
Why would a company debit Interest Receivable? It paid interest for amounts incurred in an earlier accounting period. It received an interest payment for amounts accrued in an earlier accounting period. It owes interest on its notes payable which will be paid in a later accounting period. It generated interest on its notes receivable which will be collected in a later accounting period.
It generated interest on its notes receivable which will be collected in a later accounting period.
A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______. credit; increase credit; decrease debit; decrease debit; increase
credit; decrease
The journal entry to record $5.6 million in sales on account includes a ______. (Select all that apply.) credit to Accounts Payable for $5.6 million debit to Allowance for Doubtful Accounts of $5.6 million debit to Cash of $5.6 million debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million
debit to Accounts Receivable of $5.6 million credit to Sales Revenue of $5.6 million
Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______.
debit to Bad Debt Expense of $900 credit to Allowance for Doubtful Accounts of $900
Which of the following accounts are temporary accounts closed (zeroed out) at the end of the accounting period into Retained Earnings? (Check all that apply.) Accumulated Depreciation Depreciation Expense Sales Revenue Allowance for Doubtful Accounts Bad Debt Expense Accounts Receivable
Depreciation Expense Sales Revenue Bad Debt Expense
Using the aging of receivables method, an unadjusted Allowance for Doubtful Accounts will have a credit balance when the amount of write offs recorded during the period is ______ the amount allowed in the prior accounting period. Multiple choice question.
less than
The receivables turnover ratio gives information on how ______. many times inventory is turned over per year many customers default per year many times the company sells and collects amounts on account per year profitable the company is
many times the company sells and collects amounts on account per year
Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, the ______. Allowance for Doubtful Accounts will have an $89,000 credit balance Bad Debt Expense will equal $90,000 Allowance for Doubtful Accounts will have a $91,000 credit balance Allowance for Doubtful Accounts will have a $90,000 credit balance
Allowance for Doubtful Accounts will have a $90,000 credit balance
Which of the following are advantages of using national credit cards? (Check all that apply.) no fees other than the cost of bad checks avoid lengthy cash collection periods allows for an increase in the selling price reduction of bad debts expense
avoid lengthy cash collection periods reduction of bad debts expense
The days to collect ratio is computed as ______ 365 divided by the Receivable Turnover Ratio 365 divided by Average Net Receivables net sales divided by Average Net Receivables
365 divided by the Receivable Turnover Ratio
