Chapter 5 Flashcards
What is the transfer of products and services to a customer today and expecting to collect cash in the future?
Credit Sales
What is credit sales also known as?
- Sales on Account
2. Services on Account
What is common for many business practices?
Credit sales
What is cash owed to the company by its customers for sales or services on account?
Accounts Receivable
What is accounts receivable also known as?
Trade Receivables
Make journal entry:
Link’s Dental charges $500 for teeth whitening. Dee Kay decides to have her teeth whitened on March 1 but doesn’t pay cash at the time of service. She promises to pay the $500 whitening fee to Link by March 31.
3/1 Accounts Receivable $500
Service Revenue $500
What are receivables that originate from sources other than customers?
Nontrade Receivables
What are formal credit arrangements evidenced by written debt instruments?
Notes Receivable
Which of the following are sometimes called trade receivables?
a. Accounts receivable
b. Interest receivable
c. Notes receivable
d. Tax refund claims
a. Accounts receivable
What are used to provide incentives to larger customers or certain consumer groups?
Trade discounts
What are reductions in list price of a product or service?
Trade discounts
Make journal entry:
Link’s Dental typically charges $500 for teeth whitening. Dr. Link offers a 20% discount on teeth whitening
500 x .2 = 100 ; 500 - 100 = 400
Accounts Receivable $400
Service Revenue $400
If a customer returns a product what do you debit and credit?
You debit sales return and credit accounts receivable
If a customer does not return a product and the price is still discounted what do you debit and credit?
You debit sales allowance and credit accounts receivable
Which financial statement is sales return recorded on?
The income statement
Is sales return recorded as a positive or a negative on the income statement?
A negative
Is sales allowance recorded as a positive or a negative on the income statement?
A negative
Fill in the Blank:
Sales return and sales allowance are ___________ accounts
Contra revenue
What are accounts that reduce from the gross revenue?
Contra revenue accounts
Are sale returns revenues or expenses?
They are revenues
Are sale allowances revenues or expenses?
They are revenues
Fill in the Blank:
___________ represent reductions of revenues, whereas ________ represent the separate costs of generating revenues.
- Contra revenues
2. Expenses
If a customer receives a reduction for paying within a specified period of time what do you debit and credit?
You debit cash and sales discount and credit accounts receivable
What does the term 2/10 represent?
The discount that you can get if you pay within a certain amount of days
What does the term n/30 represent?
The total number of days that you have to pay the payment
Make a journal entry:
Link’s Dental offers Dee terms of 2/10, n/30 on $350 owed; Dee pays on March 10 (Original on account day was March 1)
(D) Cash 343
(D) Sales Discount 7
(C) Accounts Receivable 350
Which financial statement is sales allowance recorded on?
The income statement
Which financial statement is sales discount recorded on?
The income statement
Is sales discount recorded as a positive or a negative on the income statement?
A negative
The effect of a sales allowance will result in which of the following:
a. An increase to net income
b. A decrease to net income
c. An increase to accounts receivable
d. An increase to sales revenue
b. A decrease to net income
What is the formula to find Net Revenue?
Total Revenue – Sales Discounts – Sales Allowances
What is the amount of cash we expect to collect?
The Net Realizable Value
Fill in the Black: Increase/Reduce
Estimated uncollectible accounts ______ assets and ______ expenses
- Reduce
2. Increase
What bases the estimate of bad debts on a balance sheet amount?
The percentage-of-receivables method
What is the percentage-of-receivables method also known as?
The balance sheet method
Which financial statement is bad debt expense reported on?
The income statement
Which financial statement is contra assets reported on?
The balance sheet
What reduces the balance for total assets?
Allowance for Uncollectible Accounts
Make a journal entry
At the end of 2018, Kimzey is owed $20 million from customers and estimates that 30% will not be collected.
20 million x .3 = 6 million
Bad Debt Expense 6
Allowance for Uncollectible Accounts 6
Is allowance for uncollectible accounts recorded as a positive or a negative on the balance sheet?
A negative
Is allowance for uncollectible accounts an asset, liability, or stockholders’ equity?
It’s a asset
Which of the following is true regarding Allowance for Uncollectible Accounts?
a. It is a liability account.
b. It is added to the total of Sales Discounts, Sales Returns, and Sales Allowances.
c. It is subtracted from the balance of Accounts Receivable in the balance sheet.
d. It appears in the income statement as an expense.
c. It is subtracted from the balance of Accounts Receivable in the balance sheet.
How do you find Accounts Receivable’s net realizable value?
Accounts Receivable - Allowance for Uncollectible Accounts
What is considered the age of receivables?
The aging method
Fill in the Blank: Older or Younger
In the aging method _____ accounts are more likely uncollectible
Older accounts
When you have an estimate that won’t be collected at the end of the year what do you debit and credit?
You debit bad debt expense and credit allowance for uncollectible accounts
Which of the following is true about the aging method?
a. No estimate for uncollectible accounts is made.
b. Older accounts are more likely to be collected.
c. It is not acceptable for GAAP.
d. Older accounts are less likely to be collected.
d. Older accounts are less likely to be collected.
What does a write off reduce the balances of?
Accounts receivable and allowance for uncollectable accounts
Does a write off affect total assets?
No
Does a write off affect total expenses?
No
Why doesn’t a write off affect total assets?
The negative effects of bad debts are already recorded
When you make a write off what do you debit and credit?
In your first entry you debit accounts receivable and credit allowance for uncollectible accounts
In your second entry you debit cash and credit accounts receivable
Make a journal entry:
Kimzey receives notice that Bruce Easley has filed for bankruptcy and will not pay $4,000
Kimzey writes off Bruce’s account receivable
Accounts receivable 4,000
Allowance for uncollectible accounts 4,000
Cash 4,000
Accounts receivable 4,000
Does the collection of accounts previously written off have any affect on total assets?
No
Does the collection of accounts previously written off have any affect on net income?
No
If you collect a payment previously written of what do you debit and credit?
You debit cash and credit allowance for uncollectible accounts
When writing off an uncollectible account:
a. Bad debt expense is debited.
b. Net income is decreased.
c. Total assets are unchanged.
d. The allowance account is credited.
c. Total assets are unchanged.
When you have a year end adjustment what do you debit and credit?
You debit bad debt expense and credit allowance for uncollectable accounts
Is bad debt expense a positive or negative on the income statement?
A positive
What is the difference between the allowance method and the write-off method?
Timing
On December 31 before adjusting entries, a company reports the following balances:
Accounts Receivable - 100,000
Allowance for U.A - 2,000 (Credit)
The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include:
a. A debit to Bad Debt Expense = $18,000
b. A credit to Allowance for Uncoll. Accts. = $24,000
c. A credit to Allowance for Uncoll. Accts. = $22,000
d. A debit to Bad Debt Expense = $20,000
a. A debit to Bad Debt Expense = $18,000
100,000 x 20% = 20,000
20,000 - 2,000 = 18,000
- 2,000 b/c it’s credit
What is similar to accounts receivable but include a written debt agreement, or note?
Note Receivable
If you have a notes receivable without interest what do you debit and credit?
You debit notes receivable and credit service revenue
Make a journal entry for initial note:
Kimzey provided $10,000 of services to Justin Payne, who is not able to pay immediately
Justin Payne signs a promissory note, offering to pay $10,000 plus 12% interest in six months (August 1).
Notes Receivable 10,000
Service Revenue 10,000
If you are collecting a notes receivable with interest what do you debit and credit?
You debit cash and credit notes receivable and interest revenue
What is the formula to find interest?
Interest = Money x percentage x the # of months
Kimzey provided $10,000 of services to Justin Payne, who is not able to pay immediately
Justin Payne signs a promissory note, offering to pay $10,000 plus 12% interest in six months (August 1).
After six months, Kimzey collects the full amount owed by Justin, including interest
Make a journal entry for the collection of notes receivable and interest
Interest = 10,000 x .12 x (6/12) = 600
(D) Cash 10,600
(C) Notes Receivable 10,000
(C) Interest Revenue 600
Make a journal entry:
On December 31, 2018, Kimzey accrues interest for note receivable accepted on November 1, 2018.
Amount = 10,000
Percentage = 12%
Accrual Interest = 10,000 x .12 x (2/12) = 200
Interest Received 200
Interest Revenue 200
Make a journal entry:
On May 1, 2019, the maturity date, Kimzey collects the note of $10,000 and the interest of $600.
Percentage = 12%
2019 Interest = 10,000 x .12 x (4/12) = 400
(D) Cash 10,600
(C) Notes Receivable 10,000
(C) Interest Receivable (2018) 200
(C) Interest Revenue (2019) 400
A company accepts a note receivable of $5,000 on September 1, 2018, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2018 and 2019?
a. 2018 = $100; 2019 = $150
b. 2018 = $125; 2019 = $125
c. 2018 = $150; 2019 = $100
d. 2018 = $0; 2019 = $250
a. 2018 = $100; 2019 = $150
What is the number of times during a year the average accounts receivable balance is collected?
The Receivable Turnover Ratio
What is the formula to find the receivable turnover ratio?
Net Sales/ Average Accounts Receivable
What is the formula to find average accounts receivable?
(Beg A/R + End A/R) / 2
What is the number of days the average accounts receivable balance is outstanding?
The Average Collection Period
What is the formula to find the average collection period?
365/receivable turnover ratio
Is it better to have a higher or lower receivable turnover ratio?
It’s better to have a higher turnover
Is it better to have a higher or lower average collection period?
It’s better to have a lower collection period
Which of the following would be true for a company that has an accounts receivable turnover of 10?
a. The company turns over their accounts receivable more than once a month.
b. The company would have an average collection period of 36.5 days.
c. The company would be considered as doing an efficient job of collecting receivables if the terms were net 30.
d. The company would have an average collection period of 20 days.
b. The company would have an average collection period of 36.5 days.
What estimates uncollectible accounts based on the percentage of credit sales?
The Percentage-of-Credit-Sales Method
What is the Percentage-of-Credit-Sales Method also known as?
The income statement method
What adjusts the allowance for uncollectible accounts for the current year’s credit sales that we don’t expect to collect ?
The Percentage-of-Credit-Sales Method
On December 31 before adjusting entries, a company reports the following balances:
A/R - 100,000
Allowance for U.A - 2,000 (credit)
Credit Sales - 500,000
The company estimates bad debts to be 4% of credit sales. The adjust entry would include:
a. A debit to Bad Debt Expense = $18,000
b. A credit to Allowance for Uncoll. Accts. = $24,000
c. A credit to Allowance for Uncoll. Accts. = $22,000
d. A debit to Bad Debt Expense = $20,000
c. A credit to Allowance for Uncoll. Accts. = $22,000
$500,000 × 4% = $20,000
20,000 + 2,000 (C) = 22,000
What do you debit and credit when you accrual interest?
You debit interest received and credit interest revenue
