Lecture 10

Question 1

accumulated depreciation is a contra ___ account

Answer 1

asset

Question 2

sales returns and allowances is a contra ___ account

Answer 2

revenue

Question 3

allowance for doubtful accounts is a contra ___ account

Answer 3

asset

Question 4

sales returns journal entry (record sale & sales return)

Answer 4

1. A/R (or Cash)
   Sales Rev
2. Sales returns
   A/R (or Cash)

Question 5

Sales discounts (2 types)

Answer 5

1. trade/volume discounts = reduction for a particular class of customers
2. cash or sales discounts = encourage prompt payments

Question 6

trade/volume discounts

Answer 6

record at DISCOUNTED price

ex. large quantity, early orders

Question 7

cash/sales discounts

Answer 7

record at FULL price

contra-revenue Sales Discounts used

Question 8

credit terms (ex. interpret 2/10, n/30)

Answer 8

customer gets a 2% discount by paying w/in 10 days or NO discount (pays full amount) w/in 30 days

Question 9

how do sales returns and cash discounts affect sales?

Answer 9

they decrease sales

Question 10

journal entry to record payment received w/in 10 days (2/10, n/30)

Answer 10

Cash 98
sales discount 2
A/R 100

Question 11

gross sales

Answer 11

total sales revenue before deducting sales returns and allowances and cash discounts, if any

Question 12

net sales

Answer 12

total sales revenue reduced by sales returns and allowances and cash discounts

Question 13

direct write-off method

Answer 13

in period in which sales made, NI overstated
in period when default occurs, NI understated
time b/w sale and time of defualt, AR overstated

Question 14

direct write-off method journal entry

Answer 14

bad debts expense

A/R

Question 15

allowance for doubtful accounts method

Answer 15

est amount of bad debt based on past history
maintain AFDA account (contra-asset)
this updates every period with new estimates

Question 16

journal entry for bad debts est and write off

Answer 16

1. bad debts expense
   allowance for bad debt
2. allowance for bad debt
   A/R

Question 17

periodic increases in AFDA account

Answer 17

reflects new periodic estimations of default that flow to bad debt exp (which lowers the period’s NI)

Question 18

periodic decreases in AFDA account

Answer 18

result from PERMANENT write-offs of particular A/R’s

decreases DO NOT flow to bad debt expense since the expense was already taken when the original estimate was made

Question 19

% of sale method

Answer 19

bad debt exp will always be x% times current period credit sales

changes in AFDA will be the period’s bad debt exp

prior journal entries already accounted for anticipated default; when it happens, avoid double counting by…
SUBTRACT default amount from AR (credit)
SUBTRACT default amount from AFDA (debit)

Question 20

ex. 3% of sales not collectible, $2M sales, actual default of 57,000

Answer 20

A/R    2M
       Sales Rev    2M
Bad debt exp    60,000
       AFDA                   60,000
AFDA    57,000
       A/R     57,000

Question 21

% of A/R method; steps

Answer 21

estimate DESIRED EB of AFDA as a percentage of the current ending balance of A/R

1. historical avg uncollectible % = ave write-offs / ave EB A/R
2. desired EB AFDA = (hist avg uncollectible %) * (current period EB AR)
3. make adjusting entry to get AFDA to target amount
   bad debt exp
   AFDA

Question 22

aging of receivables method

Answer 22

for each age category, there is a dollar amount of accounts in each one, with probability of default

multiply dollar amount and probability of default to get contribution to AFDA

get total AFDA by adding up all category amounts

Question 23

when rate is too high (AFDA balance is too high), adjusting entry:

Answer 23

AFDA

Gain on Re-estimation

Question 24

when rate is too low (AFDA balance is too low), adjusting entry:

Answer 24

Loss on re-estimation

AFDA

Question 25

recovery of bad debt

Answer 25

reverse write-off and record normal collection

A/R
AFDA
Cash
A/R