Accounts Receivable - Accounting and Reporting Flashcards
On June 1, 2005, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%.
Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation.
On June 12, 2005, Pitt received from Burr a remittance in full payment amounting to
A) $2,744
B) $2,940
C) $2,944
D) $3,140
$5,000(1 - .30)(1 - .20)(.98) + $200 = $2,944.
The chain trade discounts are applied to each successive net amount as shown in the calculation, and the cash discount of 2% is then applied to the final invoice amount.
The cash discount applies because the payment was made within 15 days of purchase. The goods were shipped FOB shipping point. Therefore, title transferred to Burr at the shipping point, meaning Burr bears the shipping charges. Because Pitt prepaid them as an accommodation, Burr must reimburse Pitt for the $200, the last term in the calculation leading to $2,944.
Answer = C
Alfisol, Inc. offers sales discounts of 2% on all credit sales paid within 15 days. For year 1, gross credit sales totaled $150,000 and 75% of Alfisol’s customers took advantage of the discount. Under the net method:
A) Each sale should not be recorded until payment is received and it is known whether the discount is taken.
B) Allowance for sales discounts must be credited for $2,250.
C) For cash receipts within the discount period, sales discounts must be debited for $2,250.
D) For cash receipts after the discount period, discounts not taken must be credited for $750
Under the net method, sales are initially recorded net of discounts. Payments received after the discount period total $37,500 ($150,000 × 25%), and the amount of discounts forfeited is $750 ($37,500 × 2%). Under the net method, the entry to record these receipts is
Cash 37,500
AR 36,750
Discounts not taken 750
Answer = D
Steven Corporation began operations in year 1. For the year ended December 31, year 1, Steven made available the following information:
Total merchandise purchases
for the year $350,000
Merchandise inventory at
December 31, year 1 70,000
Collections from customers 200,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales are on a credit basis and all receivables are collectible, what should be the balance in accounts receivable at December 31, year 1?
A) $ 50,000
B) $192,000
C) $250,000
D) $290,000
The first step is to determine sales for year 1. The cost of goods sold in year 1 is $280,000 ($350,000 purchases less $70,000 ending inventory). Note that beginning inventory is zero because the company began operations in year 1. Since all merchandise was marked to sell at 40% above cost, year 1 credit sales are $392,000 ($280,000 cost of goods sold × 140%). The second step is to determine the ending balance in accounts receivable.
Answer = B
When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?
Accounts Receivable Allowance for uncollectible
accounts
A) Increase Decrease
B) Increase No effect
C) No effect Decrease
D) No effect Increase
When an account is written off, the journal entry is debit the allowance for uncollectible accounts and credit accounts receivable. If the account is subsequently collected, an entry is made to reinstate the account receivable by debiting accounts receivable and crediting the allowance for uncollectible accounts. A second entry is made for the cash collection which involves debiting cash and crediting accounts receivable. Therefore, there is no change in accounts receivable when a previously written-off account is collected; accounts receivable is debited for the reinstatement, and credited for the payment. However, when the previously written-off account is collected, there is an increase in the allowance for uncollectible accounts.
Answer = D
When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of a small account previously written off would
A) Increase net income.
B) Decrease the allowance for doubtful accounts.
C) Have no effect on the allowance for doubtful accounts.
D) Increase the allowance for doubtful accounts.
The solutions approach is to determine the journal entries necessary to (1) re-establish and (2) collect the account receivable. The entry to reestablish the account would be
Accounts receivable xx
Allowance for doubtful accounts xx
The entry to record collection would be
Cash xx
Accounts receivable xx
The net effect is an increase in a current asset account, cash, and an increase in a contra asset account, allowance for doubtful accounts.
Answer = D
