LS 8: Receivables, Bad Debt Expense, and Interest Revenue
a company lends $1,000 each to two employees at a rate of 6% on December 1. one employee is to repay the note in 3 months and the other in 6 months. at December 31, how much interest will the company accrue?
$10
in its first year of business, ABC, Inc. had AR of $8,000 and credit sales of $38,000. management estimates 2% of total credit sales will be uncollectible. Bad Debt Expense equals ______
$760
ABC, Inc's unadjusted trial balance included AR $80,000 debit; AFDA $750 credit; and credit sales $400,000 credit. ABC uses the aging of AR method and estimates that $8,000 of its receivables will be uncollectible. after the adjusting entry is made, ABC's financial statements will report _____.
- AFDA of $8,000 on the BS - Bad Debt Expense of $7,250 on the IS
match each account with the proper description - NR - Interest Receivable - Interest Rev - principal amount - amount of interest earned - amount of interest earned but not yet collected
- NR: principal amount - Int. Rec.: amount earned but not yet collected - Int. Rev.: amount of interested earned
the days to collect ratio provides what kind of info? - that a higher number of days means a shorter (better) time for collection - average number of days from sale on account to collection - higher number of days means a longer (worse) time for collection - higher number of days means more customers are defaulting
- average number of days from sale on account to collection - a higher number of days means a longer (worse) time for collection
which of the following are advantages of using national credit cards? - avoid lengthy cash collection periods - reduction bad debts expense - no fees other than the cost of bad checks - allows for an increase in the selling price
- avoid lengthy cash collection periods - reduction of bad debts expense
using the aging approach, management estimates that 10% of AR will be uncollectible. the AFDA has a $100 unadjusted debit balance. the adjusting entry to record estimated bad debts includes a _____ - credit to AFDA of $900 - debit to Bad Debt Expense of $900 - debt to Bad Debt Expense of $1,100 - credit to AFDA of $1,000 - credit to AFDA of $1,100 - debit to Bad Debt Expense of $1,000
- debit to Bad Debt Expense of $1,100 - credit to AFDA of $1,100
the objectives when accounting for AR and bad debts are to ______ - report AR at the net realizable value which equals AR less the amount the co. doesn't expect to collect - increase both AR and net income by the amount of credit sales that are unlikely to be collected as cash - match the cost of bad debts to the accounting period in which the related credit sales are made
- report AR at the net realizable value which equals AR less the amount the co. doesn't expect to collect - match the cost of bad debts to the accounting period in which the related credit sales are made
accepting only cash and cancelling a credit card program that previously allowed customers to purchase merchandise on credit may cause _____ - sales to decrease - bad debt expense to decrease - sales to increase - wage expense to increase
- sales to decrease - bad debt expense to decrease
in which situations does a company issue a note receivable? - the co. lends money to employees or businesses - the co. sells to customers on account and expects payment within 30 days - the co. converts an existing AR to grant the customer an extended payment period for the amount owed plus interest
- the co. lends money to employees or businesses - the co. converts an existing AR to grant the customer an extended payment period for the amount owed plus interest
when recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. the reason is _____ - subsidiary accounts are unable to be reduced - the write-offs were previously recorded so customers' accounts would be reduced twice - the company would lose track of which customers still owe money - the amounts are estimates and no now knows which particular customers will not pay
- the co. would lose track of which customers still owe money - the amounts are estimates and no one knows which particular customers won't pay
which of the following is the typical sequence of accounting for sales made on account using the allowance method? - Bad debt Expense is estimated and recorded with an adjusting entry - AR are debited in the period the revenue is recognized - specific customer balances are written off
1. AR are debited in the period the revenue is recognized 2. Bad Debt Expense is estimated and recorded with an adjusting entry 3. specific customer balances are written off
rank companies A-C based on how favorable their receivables turnover ratio is - B: 5.6 times - C: 2.4 times - A: 3.4 times
1. B 2. A 3. C
place the events in proper sequence for a 2-yer note established in November that pays interest annually. - debit Cash and credit NR, Interest Revenue and Interest Receivable - debit Cash and credit Interest Receivable (or Interest Revenue if not previously recorded) - debit Notes Receivable and credit Cash - debit Interest Receivable and credit Interest Revenue
1. debit NR and credit Cash 2. debit Interest Receivable and credit Interest Rev 3. debit Cash and credit Interest Receivable (or Interest Rev if not previously recorded) 4. debit Cash and credit Notes Receivable, Interest Rev and Interest Receivable
which of the following is an interest-bearing current asset? - NP due in 2 years - NP due in 3 months - AP - AR - NR due in 3 months - NR due in 2 years
NR due in 3 months
removing an uncollectible account and its corresponding allowance from the accounting records is called _____
a write-off
which method requires first estimating the desired amount for the AFDA and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance? - direct write-off method - aging of AR method - percentage of credit sales method
aging of accounts receivable method
Accounts Receivable represent ______
amounts owed to a business by its customers
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 Int. Rec. and credit to Int. Rev. for the interest generated in December
the challenge businesses face when estimating the allowance for previously recorded sales is that _____ - at the time of sale, it is not known which particular customer will be a "bad" customer - past default rates aren't a good predictor of future default rates - in bad economic times, fewer customers will have problems with their payments
at the time of sale, it's not known which particular customer will be a "bad" customer
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
Allowance for Doubtful Accounts is a(n) _____-asset account and has a normal _____ balance
contra; credit
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? - the co. has to wait 30 days to collect cash from the credit card companies - there are no downsides as the credit card company bears all risks and costs - credit card co. charge fees that reduce profits
credit card co. charge fees that reduce profits
the entry to record the issuance of a NR is _____
debit NR and credit Cash
the direct write-off method is not allowed under GAAP because it violates the ______
expense recognition (matching) principle
using the aging of receivables method, an unadjusted AFDA will have a debit balance when the amount of write offs recorded during the period is _____ the amount estimated to uncollectible in the prior accounting period
greater than
given the unadjusted AFDA has a $50 debit balance, the amount of receivables written of was _____ than the amount estimated in the prior period. thus, bad debt expense will be _____ in the current period than had the unadjusted balance been a credit balance.
greater; greater
sales made on account are recorded with a debit to AR and credit to Sales Revenue for the price times the quantity. management knows that some of those accounts will not be collected but is unsure which specific customers it will be. thus, management estimates the amount and records an adjusting entry. later, when the specific non-paying customer is IDed, it writes off the account. the effect of the write off on the accounting equation is to _____
increase one asset and decrease another
what is occurring if a company is debiting Cash and crediting NR? - it's paying amounts owed on amounts borrowed earlier - it's collecting the principal on amounts lent earlier - it's borrowing money - it's lending money
it's collecting the principal on amounts lent earlier
using its aging of AR, Age Old, Inc. estimates that $90,000 of its $4,000,000 of AR will be uncollectible. prior to making its adjusting entry, the unadjusted AFDA has a credit balance of $1,000. after the adjustment, Bad Debt Expense on the IS will be _____ the AFDA on the BS. - the same as - greater than - less than
less than - the aging method specifies the desired ending balance in the Allowance account. the amount of the entry will depend on what the unadjusted balance in the Allowance is. the aging method specifies the desired ending balance in the Allowance account needs to be $90,000. the $1,000 unadjusted credit balance in the AFDA needs to be increased by $89,000 to get to the desired $90,000 credit AFDA balance on the BS. the adjusting entry recorded to arrive at the desired balance requires a debit to Bad Debt Expense (E,-SE) and credit to AFDA (xA,-A) of $89,000. the expense will only be $89,000 because there is a $1,000 credit balance remaining in the Allowance account before adjustment
the receivables turnover ratio is computed as _____
net sales revenue divided by average net AR
which method requires estimating the amount of the Bad Debt Expense and then determining the balance in the AFDA which will differ from the expense if there is an unadjusted balance?
percentage of credit sales method
why is the Bad Debt Expense on the IS less than the AFDA on the BS? - the AFDA had an unadjusted debit balance - the both will always be the same amounts on the IS and BS - the AFDA had an unadjusted credit balance
the AFDA had an unadjusted credit balance - prior to making the adjusting entry, the Allowance balance and an unadjusted credit balance, i.e., amounts allowed for in the past have not been written off. thus, the adjusting entry, debit Bad Debt Expense (E,-SE) and credit Allowance (xA,-A) is less than the ending balance in the Allowance account
true or false: to ensure bad debt expense and the AFDA do not become materially misstated over time, management will revise overestimates of prior period by lowering estimates in the current period
true - if the AFDA has an exceeding large credit balance because more was estimated to be uncollectible than was actually written off, management will lower its estimates in the current period
