Quiz 7
If the allowance method is used, how do the two entries recorded in connection with the recovery of an uncollectible account affect the elements of the financial statements?
No effect on total assets or stockholders' equity operating activities on the statement of cash flows
Which of the following is (are) the terms used to describe the person responsible for making payment on the due date of a promissory note?
Borrower or maker or debtor
On Jan 1, Year 1, the Accounts Receivable balance was $37,000 and the balance in the Allowance for Doubtful Accounts was $2,800. On Jan 15, Year 1, an $800 uncollectible account was written-off. What is the net realizable value of accounts receivable immediately after the write-off?
$34,200 Receivable After write off = $37,000-$800 = $36,200 Doubtful After write off = $2,800- $800 = $2,000 Net realizable value = $36,200-$2,00 = $34,200
If a company uses the percent of receivables method to estimate uncollectible accounts, the company will first determine the requires ending balance in Allowance for Doubtful Accounts; the Uncollectible Accounts Expense will be the difference between that amount and the unadjusted credit balance in the Allowance for Doubtful Accounts.
TRUE
How does the year-end adjusting entry to recognize uncollectible accounts expense affect the elements of the financial statements?
decrease total assets and decrease stockholders' equity it will increase expenses which will decrease net income
What is the term used to describe the amount of accounts receivable that is actually expected to be collected?
net realizable value
When a company accepts a credit card payment for a sale, the amount of sales revenue to be recorded is reduced by the amount of the credit company's fee.
FALSE Revenue is recorded for the full amount of the sale, and the fee is recorded as a separate expense. Income increases by the amount of revenue and decreases by the amount of the credit card expense. Net income increases by the difference between the two amounts.
On June 1, Year 2, Carolina Company collected a $24,000 note receivable that had been issued on June 1, Year 1. The note carried a 6% interest rate. On June 1, Year 2, the company will recognize interest revenue in the amount of $1,440.
FALSE Year 1: 24,000x6x7/12=840 Year 2: 24,000x6x5/12=600
The adjusting entry to recognize uncollectible accounts expense does not affect the net realizable value of receivables.
FALSE net realizable = accounts receivable - allowance for doubtful accounts decreases net realizable bc it increases allowance
When an uncollectible account receivable is written off, the amount of total assets is unchanged.
TRUE decreases assets (acc recv.) and increases assets (decreases allowance for doubtful accs)
Alberta Company accepts a credit card as payment for $450 of services provided for the customer. The credit card company charges a 4% fee for handling the transaction. How does this transaction affect the elements of the financial statements?
a. 432 NA 432 432 NA 432 432 OA b. 432 NA 432 450 18 432 432 OA c. 432 NA 432 450 18 432 NA d. 450 NA 450 450 NA 450 NA C is correct!
Hancock Medical Supply Co. earned $160,000 of revenue on account during Year 1, its first year of operation. During year 1, Hancock collected $128,000 of cash from its receivables accounts. The company did not write-off any uncollectible accounts. It estimates that it will be unable to collect 1% of revenue on account. What is the net realizable value of receivables that will be reported on the balance sheet at December 31, year 1?
$30,400 Beg Acc Recv (0)+160,000-128,000=32,000 ending accounts receivable 0+(160,000x1%) - Write offs (0) = 1,600 ending allowance for doubtful acc 32,000-1,600=30,400 Net realizable
Rosewood Company made a loan of $16,000 to one of the company's employees on April 1, Year 1. The one-year carried a 6% rate of interest. What is the amount of interest revenue that Rosewood would report in Year 1 and Year 2, respectively?
$720 in Year 1 and $240 in Year 2 Interest Revenue = Principal x Annual Interest rate x time outstanding Year 1: 16,000x6%x9/12 Year 2: 16,000x6%x3/12
Sales 1,100,000 COGS 760,000 Gross Profit 340,000 Net Income 85,000 Acc Receivable (# of days to sell) 90,000 Inventory (50 days) What was Blankenship's operating cycle for the most recent year?
80 days 1,100,000 / 90,000 = 12.22 acc receivable turnover ratio 365/12.22 = 30 days to collect acc 760,000 / 105,000 = 7.24 Inventory turnover 365 / 7.24 = 50 days to sell inv. 30 + 50 = 80 days
Part 2: What effect will the entry to recognize the uncollectible accounts expense for Year 2 have on the elements of the financial statements?
Decrease total assets and income. It increases expenses, which decreases net income.
On Jan 1, Year 2, Kincaid Company's Accounts Receivable and the Allowance for Doubtful Accounts carried balances of $31,000 and $500, respectively. During year 2, Kincaid reported $72,500 of credit sales, wrote off $550 of receivables as uncollectible, and collected cash from receivables amounting to $74,550. Kincaid estimates that it will be unable to collect one percent (1%) of credit sales. Which of the following describes the effects of Kincaid's entry to recognize the write-off of the uncollectible accounts?
Does not affect assets or stockholders' equity The write-off decreases assets (accounts receivable) and increases assets by decreasing the allowance of doubtful accounts, a contra asset account. Therefore, there is no effect on total assets or stockholders' equity.
The balance in Accounts Receivable at the beginning of the year amounted to $16,000. During the year. $64,000 of credit sales were made to customers. If the ending balance in Accounts Receivable amounted to $10,000, and uncollectible accounts expense amounted to $4,000, what is the amount of cash inflow from customers that would appear in the operating activities section of the cash flow statement?
None of these are correct. 16,000+64,000-10,000 = 70,000 4,000 does not affect amounts receivable
For a company that uses the allowance method, the write-off of an uncollectible account receivable is an asset use transaction.
TRUE decreases assets (accounts receivable) and increases assets (decreases allowances for doubtful accounts)
The face value of Accounts Receivable + the balance in the Allowance for Doubtful Accounts is = to the net realizable value of the receivables.
TRUE net realizable value = accounts receivable-allowance for doubtful accounts
Which of the following is a true statement about a company that uses the allowance method?
The net realizable value of its accounts receivable is shown on the balance sheet. A company that uses the allowance method estimates uncollectible accounts expense before they actually become uncollectible, using a contra asset account known as allowance for doubtful accounts.
Buttercup Florist uses the allowances method to account for uncollectible accounts. Unable to collect a $150 account from a customer, Buttercup determined it was uncollectible. How would the write-off of this account affect the elements of the company's financial statements?
a. - -NA NA NA NA - OA b. NA NA NA NA NA NA NA c. - + NA NA NA NA - FA d. NA - - NA + - NA B is correct!
On Dec. 31, Year 1, The Loudoun Corporation estimated that 3% of its credit sales of $112,500 would be uncollectible. Loudoun uses the allowance method. On Feb 15, Year 2, one of Loudoun's customers failed to pay his $1,050 account and the account was written off. On April 4, Year 2, this customer paid Loudoun the $1,050. Which of the following correctly states the effect of Loudoun Company's February Year 2 entry to write off the customer's account?
a. NA NA NA NA NA NA NA b. (1050) NA (1050) (1050) NA (1050) NA c. (1050) (1050) NA NA NA NA NA d. NA 1050 (1050) NA 1050 (1050) NA A is correct!
How is the average number of days to collect accounts receivable computed?
accounts receivable / 365
Which accounting concept can be used by some companies to justify the use of the direct write-off method?
the materiality concept The direct write-off method fails to match revenues with expenses and overstates accounts receivables on the balance sheet. It is easier to use, however, and is permitted by generally accepted accounting principles if the amount of uncollectible accounts is immaterial.
Which of the following is a cost of extending credit to customers?
uncollectible accounts expense Two costs of extending credit to customers are uncollectible accounts expense and record keeping costs.