Chapter 7

Question 1

trade receivables

Answer 1

arise from the sale of products or services to customers

Carried in the Accounts Receivable account

Question 2

nontrade receivables

Answer 2

arise from other transactions like advances to employees and utility company deposits

Question 3

nontrade receivables

Answer 3

arise from other transactions like advances to employees and utility company deposits

not directly related to sales of products/services

Question 4

Bank Card Payment

Answer 4

Debit: cash and service charge
Credit: sales

Question 5

CC Payment

Answer 5

AR: Debit
Sales: Credit

when cc company pays and we know fee amount

Debit: cash and service charge
Credit: sales

Question 6

Uncollectable accounts

Answer 6

called bad debt

Question 7

direct write-off method

Answer 7

a specific account receivable is removed from the accounting records at the time it is finally determined to be uncollectible

Debit: uncollectable accounts receivable
Credit: AR

Question 8

Immaterial Amount

Answer 8

an item is deemed material if it is large enough to affect the judgment of an informed financial statement user

Question 9

Allowance methods

Answer 9

account for uncollectible accounts

result in the recording of an estimated bad debts expense in the same period as the related credit sales

the actual write-off in a subsequent period will generally not impact income

Question 10

allowance method for uncollectibles

Answer 10

A method that estimates uncollectibles as a portion of total receivables and establishes an offsetting contra allowance account

Question 11

Allowance account

Answer 11

contra asset account

Question 12

net realizable value

Answer 12

amount of cash expected to be collected on outstanding accounts receivable

accounts receivable minus the allowance for uncollectibles

Question 13

Determine the allowance account amount

Answer 13

1. Percentage of total receivables
   anticipate certain amount won’t be collected
2. Aging Analysis

Question 14

aging of accounts receivable

Answer 14

stratify receivable according to how long they have been outstanding

apply alternate %’s to different strata

Question 15

% of total receivables and aging are:

Answer 15

balance sheet approaches

Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts

Question 16

Balance Sheet Approaches

Answer 16

with balance sheet approaches, the amount of the entry is based upon the needed change in the account (i.e., to go from an existing balance to the balance sheet target amount), and
•the debit is to an expense account, reflecting the added cost associated with the additional amount of anticipated bad debts.

Question 17

income statement approach

Answer 17

simpler

equally acceptable

estimated % of sales is

Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts

technique merely adds the estimated amount to the Allowance account

Question 18

Balance Sheet Approaches

Answer 18

with balance sheet approaches, the amount of the entry is based upon the needed change in the account (i.e., to go from an existing balance to the balance sheet target amount), and
•the debit is to an expense account, reflecting the added cost associated with the additional amount of anticipated bad debts.

desired balance

Question 19

income statement approach

Answer 19

simpler

equally acceptable

estimated % of sales is

Debit: uncollectible accounts expense
Credit: allowance for uncollectible accounts

technique merely adds the estimated amount to the Allowance account

entry would be the same even if there was already a balance in the Allowance account. In other words, the income statement approach adds the calculated increment to the allowance, no matter how much may already be in the account from prior periods

Question 20

Writing off Accounts

Answer 20

debit: allowance for uncollectable accounts
credit: AR

no impact on income statement

no impact on the net realizable value of receivables

Question 21

Previously written off accounts that pay

Answer 21

1. Reversal of write-off
   debit: AR
   credit: Allowance for Uncollectable Accounts
2. Record cash collection
   debit: cash
   credit: AR

seems weird, but another account may default

Question 22

Accounts Receivable Turnover Ratio

Answer 22

reveals how many times a firm’s receivables are converted to cash during the year

Net Credit Sales / Average Net Accounts Receivable

Question 23

Days Outstanding

Answer 23

reveals how many days sales are carried in the receivables category:

365 Days / Accounts Receivable Turnover Ratio

Question 24

Accounts Receivable Turnover Ratio

Answer 24

reveals how many times a firm’s receivables are converted to cash during the year

Net Credit Sales / Average Net Accounts Receivable
compared to industry trends
Early warning sign of potential problems in receivables management and rising bad debt risks.

Question 25

Days Outstanding

Answer 25

reveals how many days sales are carried in the receivables category:

365 Days / Accounts Receivable Turnover Ratio

compared to industry trends
Early warning sign of potential problems in receivables management and rising bad debt risks.

Question 26

One of the first signs of a business downturn

Answer 26

delay in the payment cycle.

These delays tend to have ripple effects; if a company has trouble collecting its receivables, it won’t be long before it may have trouble paying its own obligations.

Question 27

note receivable

Answer 27

written promise from client/customer to pay a definite amount of money on future specific date

may be used when a new customer has no credit history

note makes loan more formal & enforceable

typically bear interest charges

Question 28

Maker

Answer 28

party promising to make payment

Question 29

Payee

Answer 29

Party to whom payment will be made

Question 30

Principal

Answer 30

stated amount of note

Question 31

Maturity date

Answer 31

date note is due

Question 32

Interest

Answer 32

charge imposed on the borrower of the funds for use of the money

Question 33

Interest

Answer 33

charge imposed on the borrower of the funds for use of the money

interest depends on the size, rate, and duration of the note

Principal x rate x time

1,000, 60-day note, bearing interest at 12% per year,

$1,000 x 12% x 60/365

Question 34

Interest

Answer 34

charge imposed on the borrower of the funds for use of the money

interest depends on the size, rate, and duration of the note

Principal x rate x time

1,000, 60-day note, bearing interest at 12% per year,

$1,000 x 12% x 60/365

may use 360 as that was easier pre calulator- benefits creditor

Question 35

Interest

Answer 35

charge imposed on the borrower of the funds for use of the money

interest depends on the size, rate, and duration of the note

Principal x rate x time

1,000, 60-day note, bearing interest at 12% per year,

$1,000 x 12% x 60/365

may use 360 as that was easier pre calculator- benefits creditor

Question 36

ACCOUNTING FOR NOTES RECEIVABLE

Answer 36

when it reaches maturity

debit: cash
Credit; interest income & notes receivable

Question 37

dishonored the note at maturity

Answer 37

debit: AR
credit: interest income and notes receivable

if need to adjust at year end
convert AR to Note receivable