Chapter 7 - Accounting for Receivables

Question 1

receivable

Answer 1

An amount due to you from another party

Question 2

Two most common receivables

Answer 2

Accounts Receivable

Notes Receivable

Question 3

Accounts Receivable

Answer 3

What is due from customer’s for credit sales

Question 4

Entry to record a Sales on Credit

Answer 4

DEBIT - Accounts Receivable

CREDIT - Sales

Question 5

Entry to record collection of cash for an account

Answer 5

DEBIT - Cash

CREDIT - Accounts Receivable

Question 6

Entry to record interest for Sales on Store Credit

Answer 6

DEBIT - Accounts Receivable

CREDIT - Interest Revenue

Question 7

Percent of Sales Method

Answer 7

Sales x % estimated

Based on the income statement relation between bad debt expense and sales

Question 8

Percent of Receivables Method

Answer 8

AR x % estimated

Based on balance sheet relation between AR and allowance for doubtful accounts.

Allowance account balance is always adjusted to equal the estimate of uncollectibles.

Question 9

Aging of Receivables

Answer 9

Uses both past and current receivables info to estimate allowance amount.

1. Each receivable is grouped by how long it is past due
2. Each age group is multiplied by estimated bad debt percent
3. Estimated bad debt for each group is totaled

Question 10

Promissory Note

Answer 10

A written promise to pay an amount of money with interest by a certain date.

Question 11

Principal of a note

Answer 11

The specified amount of money on a promissory note.

Question 12

Maker

Answer 12

The one who signed the note and promised to pay it at maturity.

A note is a LIABILITY for the maker, also known as a note payable.

Question 13

Payee

Answer 13

The person to whom the note will be paid.

A note is an ASSET to the payee, also knows as a note receivable.

Question 14

Interest

Answer 14

A charge for using the money until it is due.

To the borrower it is an EXPENSE

To the lender it is REVENUE

Question 15

Maturity date and period

Answer 15

Maturity date - the day the note must be repaid

Period - time from the note’s date to maturity date.

Question 16

Interest formula

Answer 16

Principal of note x Annual Interest rate x Time expressed in fraction of 360 year

Question 17

Two methods to account for uncollectible accounts

Answer 17

1. Direct write off

2. Allowance method

Question 18

Direct write off method

Answer 18

Records loss from an uncollectible account when it is determined to be uncollectible.

Expense is recognized in FUTURE

DEBIT - Bad Debt Expense
CREDIT - AR account

Question 19

Allowance method

Answer 19

Matches estimated loss from uncollectible accounts receivable against sales they helped produce.

Expense is recognized CURRENTLY

DEBIT - Bad Debt Expense
CREDIT - Allowance for Doubtful Account

Question 20

Allowance for Doubtful Accounts

Answer 20

Contra ASSET account

Question 21

Calculating due date of note

Answer 21

1. Start with number of days in the first month and subtract the date of them note
2. Continue adding days until you each the period of the note (90-day, 60-day, etc.)