Chapter 5

Question 1

Sales Discounts

Answer 1

Incentive for customers to pay early.

Ex: 2/10, net 30
2 -> percent discount
10 -> number of days to get a discount
30 -> due in full

Question 2

Sales Returns & Allowances

Answer 2

When customers return merchandise or receive damaged goods.

Sales - Discounts - R+A = Net Sales

Question 3

Bad Debts

Answer 3

The cost of doing business on CREDIT with customers who don’t pay.

A. Accounts Affected:
1. Bad Debt Expense - selling expense (operating expense on income statement and closed @ year-end)
2. Accounts Receivable - a current asset on BS. Reported as NRV (the amount the business expects to collect).
AR - ADA = NRV
3. Allowance for Doubtful Accounts (ADA) - Amount of AR you don’t expect to receive; contra-asset**

Question 4

Bad Debts

Answer 4

B. Recording & Reporting

When should we record uncollectible receivables?

1. Direct Write-Off Method - records BDE only when a bad debt customer has been identified. Violates matching and is only allowed when AR is immaterial.

[ BDE
AR]

2. Allowance Method - estimates BDE at END OF YEAR and recorded through an AJE. Follows matching!
   - recording credit sales: [AR, Rev]
   - customer making regular payment on account: [Cash, AR]
   - writing off AR when known: [ADA, AR}
   - collecting previously written off AR during year: [AR, ADA] + [Cash, AR]
   - recording BDE @ Yr End: AJE [BDE, ADA]

Question 5

IS Method

Answer 5

Estimating % of Credit Sales for the year -> BDE on IS

Question 6

BS Method

Answer 6

Estimating % of End AR -> Ending Balance of ADA on BS

Question 7

Notes

Answer 7

Components:
1. Principle - amount borrowed
2. Interest - an expense for borrower, income/revenue for lendor
3. Maturity value - P + I
4. Time Period - always annual

(issuer = borrower)

lender pov:
issuance of note: [notes rec, cash]
year-end AJE: [int rec, int rev]
payment at maturity: [cash, note rec, int rec, int rev]

Question 8

Account Receivable Turnover

Answer 8

Net Sales/((Beg AR + End AR)/2)