Receivables

Question 1

receivables

Answer 1

Amounts due from individuals and other companies that are expected to be collected in cash.

Question 2

amounts receivable

Answer 2

Amounts owed by customers that result from the sale of goods and services.

Question 3

notes receivable

Answer 3

Written promise (as evidenced by a formal instrument) for amounts to be received.

Question 4

other receivables

Answer 4

“Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable).

Question 5

Recognizing Accounts Receivable

Answer 5

• Service organization - records a receivable when it provides service on account.
• Merchandiser - records accounts receivable at the point of sale of merchandise on account

Question 6

Valuing Accounts Receivable

Answer 6

Current asset to net realizable value

Question 7

Uncollectible Accounts Receivable

Answer 7

Sales on account raise the possibility of accounts not being collected.
Seller records losses that result from extending credit as Bad Debt Expense

Question 8

Method of accounting for uncollectible accounts

Answer 8

• direct write-off: Theoretically undesirable: No matching, Receivable not stated at cash realizable value, Not acceptable for financial reporting
• allowance method: losses are estimated; better matching, Receivable stated at cash realizable value, Required by IFRS

Question 9

allowance method

Answer 9

1. Companies estimate uncollectible accounts receivable.
2. Debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a contra-asset account).
3. Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time the specific account is written off as uncollectible.

Question 10

reasons why companies sell their receivables

Answer 10

• receivables may be the only reasonable source of cash

- billing and collection are often time-consuming and costly

Question 11

Sale of receivables

Answer 11

• finance company or bank buys receivables from businesses and then collects the payments directly from the customers.
  They typically charges a commission to the company that is selling the receivables. Fee ranges from 1-3% of the receivables purchased

Question 12

credit Card sales

Answer 12

Recorded the same as cash sales; Retailer pays card issuer a fee of 2 to 6% for processing the transactions.

Question 13

estimating allowance

Answer 13

• percentage of sales

- percentage of receivables

Question 14

percentage of sales

Answer 14

Management estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy. Emphasis on Income Statement realationship

Question 15

percentage of receivables

Answer 15

Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. emphasis on Statement of financial Position relationship