CHAPTER 8

Question 1

Characteristics of accounts receivable

Answer 1

amounts owed by the customer’s account

result from sales of goods or services

expected to be collect within 30-60 days

MOST significant type of claim held by a company

Question 2

notes receivable

Answer 2

THis is when they dont pay off aacounts receivable

Represent claimsf orwhich formal instruments of credit are issued as evidence of debt

Credit instrument normally requires payment of interest and extends for 60-90 day periods

Question 3

other receviables

Answer 3

non-operational items
loans, interest receivable, advances to employees, income tax refundables

generally reported as separate items on the balance sheet

Question 4

how do companies value accounts receivable and record their disposition?

Answer 4

?

Question 5

credit losses

Answer 5

bad debt expense
uncollectible accounts expense

part of the risk of putting things on an account

Question 6

direct write-off method

Answer 6

only good as a sales promotion
but when customers default on loans net bad debt expenses increase dramatically causing net income to slope downwards

bad debt losses are not estimated so it is not acceptable for finance reporting purposes
no allowance account is useed
accounts are written off when determined uncollectible :
Debit bad debt expense an credit accounts receivable

Question 7

Allowance Method

Answer 7

excludes values that were not collected

Better matching for income statements

journalizes as debit for bad debt :expense and
credit : allowance for doubtful acounts
when collected then you credit allowance for doubtful acccounts
Credit: accounts receivable

Question 8

UNDER THE ALLOWANCE METHOD…

Answer 8

Actual uncollectibles are DEBITED to allowance for doubtful accounts and are CREDITED to accounts receivable

Estimated uncollectibles are debited to Bad debt expense and CREDITED for Allowance for doubtful accounts

Writing off an account DOES NOT CHANGE receivables on balance sheet.

Question 9

Calculating interest on a note

Answer 9

face value of note * annual interest rate * time in terms of one year (because interest rate on notes are always annual)

Question 10

what does it mean when a note is honored

Answer 10

when it is paid fully, not just interest paid

a dishonored note is one what is not paid and if it has no hope for collection, it should be written off

Question 11

how do notes receivable, accounts recievable appear on balance sheet?

Answer 11

Notes receivable are listed before accounts receivable because they are easily converted to cash
both

Question 12

how does bad debt and interest revenue show on an income statement?

Answer 12

Bad debt expense is reported under selling expense

interest revenue: other revenues and gains

Question 13

5 steps to managing receivables

Answer 13

1. Determine to whom to extend credit
2. determine pay period
3. monitor collections
4. Evaluate the liquidity of receivables
5. accelerate cash receipts from accounts receivable s

Question 14

Receivables turnover ratio

Answer 14

net credit sales / average net receivables

Question 15

why do companies sell over receivables for cash? (3 reasons)

Answer 15

1. their size when major companies create other companies to be in charge of their receivables like ford motor creidt corp
2. sold because that may be the only reason they can do to get cash.
3. the billing and collection are time consuming and costly

Question 16

What is a factor?

Answer 16

A finance company where it sells receivables for a company for a fee

Question 17

how do you journalize accrued interest in a given year?

Answer 17

debit Interest receivable for the amount it accumulated and then credit interest revenue for that same amount

Question 18

how do i journalize a $6,800, 12-month, 6% note in exchange for an outstanding account receivable from R. Stoney

Answer 18

Debit Notes receivable 6800
credit accounts receivable 6800

the interest will be journalized separately with it is accrued.

Question 19

how do I journalize accrued interest if it was charged before the 12 month period (ie at the end of the year)

Answer 19

take the % of interest times the amount due and then if the interest is accrued at the end of the year but before the 12 month note period. then you would take number of months the note is and divide by 12. take that number and then multiply it by the interest % of amount due and then you will get the amount of interest accrued at that time

Question 20

how do I journalize buying something on account with a n/30 3/10 agreement?

Answer 20

starting amount due is debited to Accounts receivable and then credited to sales rev. If they have a return, then you debit Sales Return and credit accounts recevable. then when they pay it off before 30 days, you debit cash for the (amount - returns)- discount. You put this total debited to cash, discount value debited to SALES DISCOUNTS and then Credit Sales Rev. for the amount - return.

Question 21

turnover rate

Answer 21

?

Question 22

turnover rate

Answer 22

net credit sales (add the years and divide by #) divided by average Net accounts receivable

Question 23

average collection period

Answer 23

365/accounts receivable turnover