College Accounting I Chapter 9, Receivables
If accounts receivable has a total normal debit balance of $50,000 and the contra asset account Allowance for doubtful accounts has a normal credit balance of $5,000, what is the net realizable value?
$45,000
How would a dishonored note receivable being transferred back to accounts receivable look like on the journal?
$6000 note with $60 interest earned would appear as follows: Debit accounts receivable for $6060 credit note receivable 6000 and credit interest revenue 60
How would a honored and paid note receivable look like on the journal?
$6000 note with $60 interest earned would appear as follows: Debit cash for $6060 credit note receivable 6000 and credit interest revenue 60
Accounts receivables are normally collected within what time frame?
30-60 days
What type of account is the allowance for doubtful accounts classified as?
A contra asset account
What type of balance will the Allowance account have at the end of the accounting period if the write-offs during the period are less than the beginning balance?
A credit balance
What are accounts receivables classified as on the balance sheet?
A current asset
What are notes receivable classified as on the balance sheet?
A current asset as long as they are expected to be collected within one year
What type of balance will the Allowance account have at the end of the accounting period if the write-offs during the period are more than the beginning balance?
A debit balance
Notes may be used to settle what type of customer account?
A delinquent accounts receivable account
The buyer of a receivable is called what?
A factor
Which has a stronger legal claim, an account receivable or a notes receivable?
A notes receivable
What is a promissory note?
A written promise to pay the face amount, usually with interest, on demand or at a date in the future.
The receivables that result from sales on account are normally one of two types of accounts, what are they?
Accounts receivable or notes receivable
What is a notes receivable?
Amounts that customers owe for which a formal, written instrument of credit has been issued
If a written off amount to Allowance for doubtful accounts is later collected, how would it be journalized?
As a debit to accounts receivable (increasing it back to its previous state) and credit allowance for doubtful accounts (bringing it back to its previous state), then record the cash payment by debiting cash for the amount and crediting the accounts receivable acct.
If receivables are NOT expected to be collected within one year, how are they classified on the balance sheet?
As noncurrent assets and reported under the caption investment
What is the operating expense recorded from uncollectable receivables called?
Bad debt expense, uncollectable accounts expense, or doubtful account expense
With the allowance write-off method, how does the adjustment for the estimates of bad debt effect the records?
Because the write off is based on an estimate there is not any specific accounts receivable affected during the initial write off process. Bad debt expense is still debited just as with the direct write off method but the account to credit is Allowance for doubtful accounts.
Is a receivable recorded as a debit or credit?
Debit
Selling receivables is called what?
Factoring the receivable
What is the basic computation for figuring interest?
I=PRT Interest = Principle x Rate x Time (So if loan amount is $2000 with a 10% interest rate for 90 days then you would multiply 2000 by .10 then multiply that amount by 90 divided by 360 because interest rates are figured annually)
What is a dishonored note receivable?
If the maker of a note fails to pay the note on the due date
What are some of the characteristics of a promissory note?
It has a maker, a payee, a face amount, issuance date, due date, term, and interest rate
How Allowance for doubtful accounts increased and decreased?
It is a contra asset account therefore it is decreased with a debit and increased with a credit
How does the allowance method write off bad debts?
It records bad debt expense by estimating uncollectible accounts at the end of the accounting period. Based on the estimate, bad debt expense is recorded by an adjusting entry
After the end-of-period adjusting entry is recorded, Allowance for Doubtful accounts should always have what type of balance?
It should always have a credit balance
What are the two methods used to estimate uncollectible accounts?
Percent of sales method and Analysis of receivables method
What is the most common transaction creating a receivable?
Selling of merchandise or services on account
If an account receivable has been written off and is later collected, how would that be journalized?
Since the accounts receivable was originally credited and bad debt expense was debited, to reinstate the account the opposite would be done. Accounts receivable would be debited and bad debt expense would be credited. The payment would be shown by debiting cash and crediting accounts receivable
Which type of businesses typically use the direct write-off method?
Small businesses that sell most of their goods or services for cash or through credit cards which are recorded as cash.
If an accounts receivable has been written off and is later collected, how would that affect the accounting records?
The accounts receivable account would be reinstated by an entry that reverses the write off entry, then the cash received in payment is then recorded as a receipt on account.
Which write off method does the GAAP (General accepted accounting principles) require companies with large amounts of receivables to use?
The allowance method
Of the two write off methods, which one is more accurate?
The allowance method because it more closely relates to the matching principle
What is the face amount on a note?
The amount for which the note is written on its face prior to adjustments for interest
What is the Maturity value?
The amount that must be paid at the due date of the note. MV=P+I Maturity value = The principle or face amount + interest
How will the bad debt expense account affect the related revenues for the period?
The bad debt expense will be matched against it offsetting it
If a company decides to allow a notes receivable to extend a period to pay on an delinquent accounts receivable and the notes receivable becomes delinquent what happens?
The balance is transferred back to accounts receivable with an addition for any accumulated interest on the note
When a specific account is identified as uncollectible, how is it journalized for a company that uses the allowance method?
The company would move the specific accounts receivable and an equal amount from the allowance account. For instance, If it was $2000 then Allowance for doubtful accounts would be debited $2000 and Accounts Receivable would be credited $2000
What is the issuance date of a note?
The date that the note is issued
What are the two methods of accounting for uncollectible receivables?
The direct write off method and the allowance method
How are the estimates for uncollectibles determined?
The estimate is normally based on past experience, industry averages, and forecasts of the future
Which financial statements are affected by adjusting entries for write-offs?
The income statement and the balance sheet
What is the interest rate and how is it calculated?
The interest rate is on the front of the note and should be paid on the total face value amount. Calculations are figured on an annual percentage rate. For accounting purposes it is based on 360 days versus 365
Who is the maker of a note?
The party making the promise to pay
Who is the payee on a note?
The party to whom the note is payable
What are some indications that an account may be uncollectible?
The receivable is past due, the customer does not respond to the company's attempts to collect, the customer files for bankruptcy, the customer closes its business, and the company cannot locate the customer.
What is the term of the note?
The time between the issuance date and the due date
What is net realizable value?
The value of the receivables that is expected to be collected after an adjustment has been made for the estimated amount of allowance for doubtful accounts
The original recording sale and bad debt expense do what to each-other?
They end up cancelling each-other out
Notes and accounts receivables that result from sales transactions are sometimes called what?
Trade receivables
How does the direct write-off method record bad debts?
When an account is determined to be worthless, it goes directly to bad debt expense. Bad debt expense is debited, increasing it and Accounts receivable is credited, decreasing it.
What is the due date or maturity date of a note?
When the note is to be paid by
When calculating due dates, do you count the first day, the last day, or both?
You never count the first day and always count the last day
What are some types of receivables?
accounts receivable, notes receivable, interest receivable, taxes receivable, and receivables from officers and employees
The term receivables includes
all money claims against other entities, including people, companies, and other organizations.
