Chapter 8 (not finished)

Question 1

Receivables

Answer 1

Claims that are expected to be collected in cash
They are acquired mainly by selling goods / services and lending money
There are three types:
–> Accounts receivable: amounts customers owe on account → they result from the sale of goods and services
–> Notes receivable: are a written promise for amounts to be received
–> Other receivables: include non trade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable

Question 2

How to recognise accounts receivable

Answer 2

Debit (increase) - accounts receivable
Credit (decrease) - sales revenue

Then when the cash is paid:
Debit (increase) - cash
Credit (decrease) - accounts receivable

Question 3

Accounts receivable is an

Answer 3

Asset
When a company is unable to recover a credit it records a credit loss as a bad debt expense (or uncollectible accounts expense)

Question 4

Companies report accounts receivable on the balance sheet as an asset

Answer 4

Some receivable will become uncollectible, so companies record credit losses as Bad Debt Expense

Question 5

Direct write off method

Answer 5

When a company can’t recover credit it charges the loss to Bad Debt Expense
This method has a problem as it will only show actual losses from uncollectibles
Also, it often records the BDE in a period different from the period in which they record revenue

Question 6

Allowance

Answer 6

Involves estimating uncollectible accounts at the end of each period, which allows companies to state receivables at their cash (net) receivable value (what they expect to receive for the receivables)
This method is preferred
This method has 3 features:
–> Estimate uncollectible amounts - match this expense to the revenues of the same accounting period
–> Companies create a contra asset account called Allowance for Doubtful Accounts to which they credit the estimated uncollectibles debited from Bad Debt Expense
–> When companies can’t recover a credit they write it off. They debit Allowance for Doubtful Accounts and credit accounts receivable

Question 7

Recording estimated uncollectibles

Answer 7

Companies use a contra account because they don’t know which customers will not pay
The Allowance for Doubtful Accounts isn’t closed at the end of the fiscal year

Question 8

Recording the write off of an uncollectible account

Answer 8

To maintain segregation of duties, the employee authorised to write off accounts shouldn’t have daily responsibilities related to cash or receivables

The company doesn’t increase bad debt expense when the write off occurs - under the allowance system, companies debit every bad debt write off to the allowance account rather than to the bad debt expense

The write offs affect only the balance sheet, not the cash flow

Question 9

Recovery of an uncollectible amount

Answer 9

The company makes two entries to record the recovery of a bad debt
–> It reverses the entry made in writing off the account - this reinstates the customer’s account
–> It journalises the collection in the usual way
This only affects the balance sheet

Question 10

Percentage of receivables basis

Answer 10

A percentage of accounts receivable is estimated and - credits (decreases) allowance for doubtful account by the percentage the balance of the account
A percentage of accounts receivable is estimated and - debits (increases) bad debt expense by the percentage the balance of the account (the same amount)

Question 11

Ageing the accounts receivable

Answer 11

This concept classifies customers balances by the length of time they have been unpaid
Once all the percentage uncollectibles have been calculated the total represents the balance that allowance for doubtful accounts should have
In the bad debt expense account we record the estimated balance - existing balance of allowance for doubtful account