Chapter 8: Reporting and analyzing receivable Flashcards
How does a sale of receivables impact a company’s operating cycle?
shortens the cash-to-cash operating cycle
(When a company sells their receivables to another company for cash, it is receiving cash payment much sooner than the normal course of business. This shortens the cash-to-cash operating cycle)
Interest receivable, income taxes refundable, and advances to employees are examples of:
Other receivables
(Other receivables are nontrade receivables and do not result from the operations of the business. Examples include interest receivable, income taxes refundable) and advances to employees.
What are the two key parties to a promissory note?
Maker and Payee
(When a promissory note is created, there are two parties. The maker is the party that is promising to pay the specified amount of money and the payee is the party who will receive the payment.)
The recovery of a previously uncollectible account requires _______ journal entry(entries).
two
(Recording a payment to an account that was previously determined uncollectible requires two journal entries. The first journal entry reverses the affected accounts receivable balance back to its original amount before the write-off by debiting Accounts Receivable and crediting Allowance for Doubtful Accounts. The second entry records the collection by debiting Cash and crediting Accounts Receivable
Overhaul Trucking and Two Men Deliveries both purchased services on account from Auto Body Repairs. Auto Body Repairs recorded Overhaul Trucking’s purchase in Accounts Receivable, whereas they recorded Two Men Deliveries’ purchase in Notes Receivable. What is the difference between these two transactions?
Auto Body Repairs expects payment from Overhaul Trucking within 60 days, but they expect payment from Two Men Deliveries in more than 60 days.
__ are said to be at “arm’s length,” while __ are to be reported separately in the financial statements.
Credit sale; loans to company officers
(“Arm’s length” transactions take place in the normal course of business, while allowing employees to borrow money is a non operating transaction that should be disclosed separately.
Two customers purchased $500 of merchandise from the same store on account. The terms of both sales were 2/10, n/30. If the first customer paid in 8 days and the second customer paid in 12 days, what would be the difference in the merchandise company’s records on the date the customers paid in full?
The Cash entry for the first customer would be $490, and the Cash entry for the second customer would be $500.
(If the first customer paid within 10 days, they would receive a 2% discount on the purchase. Therefore, the total purchase would be $500 x 0.98 = $490 paid in cash with a Sales Discount of $10. If the second customer paid in 12 days, they did not receive a 2% discount. Therefore, they must pay the full amount of $500)
O’Brien Brewery and Delgado Vintage Wines both decided to write off a specific customer’s uncollectible account as a bad debt. To record this transaction, O’Brien Brewery recorded a debit to Bad Debt Expense, whereas Delgado Vintage Wines recorded a debit to Allowance for Doubtful Accounts. What is the difference between these two companies?
O’Brien Brewery uses the direct write-off method for uncollectible accounts, whereas Delgado Vintage Wines uses the allowance method for uncollectible accounts.
(When recording an uncollectible account under the direct write-off method, the company records a debit to Bad Debt Expense and a credit to the specific Accounts Receivable account that is uncollectible. This characterizes O’Brien Brewery’s method. When recording an uncollectible account under the allowance method, the company records a debit to Allowance for Doubtful Accounts and a credit to the specific Accounts Receivable account that is uncollectible. This characterizes Delgado Vintage Wines’ method.
Both Fowler Landscaping and Stanley Cleaning Services have estimated their uncollectible accounts at 12/31/22 to be $3,500. In addition, both companies use the allowance method for uncollectible accounts. If Stanley has to record an amount larger than $3,500 for their Bad Debts Expense at the end of 2022, and Fowler has to record an amount less than $3,500, what can you assume about the balance of the Allowance for Doubtful Accounts account for each company?
Stanley Cleaning Services had a debit balance in Allowance for Doubtful Accounts at the end of 2022, whereas Fowler Landscaping has a credit balance.
(The normal balance for Allowance for Doubtful Accounts is a credit balance. A company with a debit or zero balance will have a higher adjusting entry than a company with a credit balance, and a company with a zero or credit balance will have a lower adjusting entry than a company with a debit balance, provided both companies need the same ending balance. If Stanley Cleaning Services has Bad Debts Expense larger than $3,500, and Fowler Landscaping has a Bad Debts Expense smaller than $3,500, then the only correct option is that Stanley had a debit balance and Fowler had a credit balance in their Allowance for Doubtful Accounts at the end of 2022.)
Graves Construction is journalizing two transactions related to uncollectible accounts. The first transaction does not affect cash flows, but the second transaction does affect cash flows. If Graves Construction uses the allowance method to account for uncollectibles, which of the following scenarios may pertain to these transactions?
The first transaction is to record the write-off of an uncollectible account, and the second transaction is to record the recovery of a previously written off uncollectible account.
(Because no money comes into or out of the company, writing off an uncollectible account will not affect cash flows. However, cash does come into the company when an uncollectible account is recovered. Therefore, cash flows increase.)
Higgins Enterprises is accepting notes receivable from four customers for $18,000 each. Which customer will end up paying the LEAST in interest, assuming all individuals pay in full on the maturity date?
Individual 3
(Individual 1 will pay $18,000 x 6.75% x 4/12 = $405. Individual 2 will pay $18,000 x 5.98% x 1 = $1,076.40. Individual 3 will pay $18,000 x 7.3% x 90/360 = $328.50) Individual 4 will pay $18,000 x 7.15% x 8/12 = $858. Therefore, Individual 3 will end up paying the least in interest.
What is the primary difference between a note receivable and an account receivable?
When issuing a note receivable, the company has to compute interest and determine a maturity date, but they do not have to do this for an account receivable.
(There are several differences between notes receivable and accounts receivable. One primary difference is that the payee company must compute interest and determine a maturity date for a note receivable. This is generally not required for an account receivable. Accounts receivable are generally paid earlier than notes receivable. In addition, the payee of notes receivable has a stronger legal claim to assets then does a payee of accounts receivable.)
What is the annual interest rate for a 90-day note issued with a face value of $8,000 that will earn interest of $160?
8%
Using the formula I = PRT where I is the amount of interest earned on the note, P is the principal of the note, R is the interest rate, and T is the time of the note in terms of one year, the interest rate can be determined by multiplying the principal and time ($8,000 x (90/360) = $2,000). Dividing the interest by this amount ($160/$2,000) results in an interest rate of 8%.
Which of the following will occur if a company shortens its collection period? Accounts receivable turnover will increase.
Company 4
(Average collection period is 365 divided by accounts receivable turnover. It measures the average amount of time a receivable is outstanding. The higher the AR turnover, the shorter the period for the company to collect its accounts receivable. This will decrease accounts receivable.)
Four companies each have a credit term period of 45 days. Based on each company’s net credit sales and average net accounts receivable for 2022, which company is MOST successful at collecting their accounts receivable?
Company 3
(Company 1 has an accounts receivable turnover of $3.7 million/$451,000 = 8.20 and an average collection period of 365/8.20 = 44.5 days. Company 2 has an accounts receivable turnover of $1.63 million/$182,000 = 8.96 and an average collection period of 365/8.96 = 40.7 days. Company 3 has an accounts receivable turnover of $740,000/$56,000 = 13.21 and an average collection period of 365/13.21 = 27.6 days. Company 4 has an accounts receivable turnover of $2.12 million/$347,000 = 6.11 and an average collection period of 365/6.11 = 59.7 days. Therefore, the company that is most successful at collecting receivables is Company 3.)
