PA Chapter 9

Question 1

what is account receivable

Answer 1

amounts customers owe on account that result from the sale of goods and services

Question 2

what is notes receivable

Answer 2

written promise for amounts to be received, Normally requires the collection of interest

Question 3

what is other receivables

Answer 3

nontrade receivables such as interest, loans to officers, advances to employees and income taxes

Question 4

recognizing accounts receivables in service organizations

Answer 4

record a receivable when it performs service on account

Question 5

recognizing accounts receivable in merchandisers

Answer 5

record accounts receivable at point of sale of merchandise on account

Question 6

recognizing accounts receivable in companies

Answer 6

report receivables from employees separately in financial statements

Question 7

Valuing accounts receivables

Answer 7

account: current asset
valuation: cash (net) realizable value

Question 8

what is the account Bad Debt Expense

Answer 8

companies record estimated future credit losses as debits to Bad Debt Expense

Question 9

methods of accounting for uncollectible accounts

Answer 9

1. direct write off
2. allowance method

Question 10

characteristics of direct write off method

Answer 10

1. no matching
2. receivable not stated at cash (net) realizable value
3. not acceptable for financial reporting

Question 11

characteristics of allowance method

Answer 11

1. better matching
2. receivable stated at cash (net) realizable value
3. required by GAAP

Question 12

steps in allowance method

Answer 12

1. estimate uncollectible accounts receivables
2. debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a CONTRA ASSET ACCOUNT)
3. debit Allowance for Doubtful Accounts and credit Account Receivables at the time the specific account is written off as uncollectible

Question 13

Reasons for companies to sell receivables

Answer 13

1. receivables may be the only reasonable source of cash
2. billing and collection are often time consuming and costly

Question 14

Service charge expense

Answer 14

debit balance

Question 15

Advantages of Credit Cards to the Retailer

Answer 15

Retailer receives cash more quickly from credit card issuer

Question 16

what is a promissory note

Answer 16

is a written promise to pay a specified amount of money on demand or at a definite time

Question 17

who is the payee and the maker in a promissory note

Answer 17

-to the payee, the promissory note is a note receivable
-to the maker, the promissory note is a note payable

Question 18

formula for commuting interest

Answer 18

face value of note x annual interest rate x time in terms of year = interest

Question 19

Counting days in computation of interest

Answer 19

omit the date the note is issued but include the due date

Question 20

valuing notes receivable

Answer 20

-report short-term notes receivable at their cash (net) realizable value
-estimation of cash realizable value and bad debt expense are done similarly to accounts receivable
-allowance for doubtful accounts is used

Question 21

honor and dishonor of Notes Receivable

Answer 21

honor of notes receivable
-maker pays it in full at its maturity date
dishonor of note receivable
-not paid in full at maturity
-no longer negotiable