Chapter 5

Question 1

When should revenue be recognized at a single point in time?

Answer 1

Control of the good/service is transferred.
Legal right to payment exists.
Risks and rewards of ownership are transferred.
Example: Delivery of a product that the customer can use and benefit from.

Question 2

When should revenue be recognized over a period of time?

Answer 2

The customer benefits from the seller’s work as it is completed.
The seller enhances an asset used by the customer.
The asset has no alternative use to the seller and is customized for the customer.
Example: Consulting services or construction projects in progress.

Question 3

Formula for calculating net revenue

Answer 3

Total Revenue - sales returns - sales discounts
Total Revenue = $10,000; Returns = $500; Discounts = $200. Net Revenue = $9,300.

Question 4

When is accounts receivable recognized in credit sales?

Answer 4

At the time of the credit sale.

Question 5

What is an allowance for uncollectible accounts?

Answer 5

A contra-asset account estimating accounts receivable unlikely to be collected.
Methods:

Aging Method: Based on overdue accounts.
Percentage of Sales: Based on a percentage of credit sales.
Example: Estimate $500 uncollectible.

Question 6

How are accounts written off as uncollectible?

Answer 6

When a specific account is deemed uncollectible.
Entry:

Debit: Allowance for Doubtful Accounts.
Credit: Accounts Receivable.
Example: Write off a $300 uncollectible account.

Question 7

How is the allowance for uncollectible accounts adjusted?

Answer 7

Adjust based on changes in estimated uncollectibles.
Entry:

Debit: Bad Debt Expense (if allowance increases).
Credit: Allowance for Doubtful Accounts.
Example: If write-offs exceed estimates, increase the allowance.

Question 8

What is the receivables turnover ratio?

Answer 8

ReceivablesTurnoverRatio=NetCreditSales / Average accounts receivable
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Purpose: Measures efficiency in collecting receivables.
Example: Net Credit Sales = $600,000; Avg Receivables = $150,000. Turnover = 4.

Question 9

What is the average collection period?

Answer 9

Average collection Period = 365 days/ receivables turnover ratio
Purpose: Shows how many days, on average, it takes to collect receivables.
Example: Turnover Ratio = 4. Average Collection Period = 91.25 days.