SET 5 - Lecture notes 5 PDF

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Foundations of Accounting class from Fall 2017. Taught by Professor Jane Sarvalegam., Foundations of Accounting class from Fall 2017. Taught by Professor Jane Sarvalegam....

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SET 5 Accounts Receivables The amount of cash owed to the company by it's customers from the sale of products or services on account

Aging method Using a higher percentage for "old" accounts than for "new" accounts when estimating uncollectible accounts

Allowance for uncollectible accounts Contra asset account representing the amount of accounts receivable that we do not expect to collect

Allowance method Recording an adjustment at the end of each period to allow for the possibility of future uncollectible accounts. The adjustment has the effects of reducing assets and increasing expenses

Average collection period Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio

Bad debt expense The amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period

Contra revenue account An account with a balance that is opposite, or "contra," to that of its related revenue account

Credit sales Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. AKA sales on account or services on account

Direct write-off method Recording bad debt expense at the time we know the account is uncollectible

Net accounts receivable The difference between total accounts receivable and the allowance for uncollectible accounts

Net realizable value The amount of cash the firm expects to collect

Net revenues A company's total revenues less any discounts, returns and allowances

Notes receivable Formal credit arrangements evidenced by a written debt instrument, or note

Percentage-of-receivables method Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

Receivables turnover ratio Number of times during a year that the average accounts receivable balance is collected (or "turned over"). It equals net credit sales divided by average accounts receivable

Sales allowance Deller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service

Sales discount

Reduction int he amount to be paid by a credit customer if payment on account is made within a specified period of time

Sales return Customer returns a product

Trade discount Reduction in the listed price of a product or service

Uncollectible accounts Customers' accounts that are no longer considered collectible

A company will debit __________ while recording a credit sale at the time of the transaction.

Cash Accounts Receivable Accounts Receivable

Accounts receivable originate from __________.

Credit Sales Cash Sales Credit Sales

A company makes a credit sale for $500. Future collection from the customer is reasonably certain. The company will record revenues from the transaction __________.

At the time of the cash transaction Immediately

Immediately

A company performs a service on account. Recording a sale on account will include a credit to __________. Unearned Revenue Service Revenue Service Revenue

Which of the following are contra-revenue accounts? Sales Discounts Trade Discounts unearned Revenues Sales Returns Sales Discounts, Sales Returns (A contra-revenue account is an account with a balance that is opposite or "contra" to that of its related revenue account.

Which of the following accounts are recorded when a customer pays within the account period? Sales Discounts Service Revenue Cash Trade Discounts Accounts Recievable sales discounts, cash, accounts receivable (Think of the way in which the transaction would have been recorded at the time of preforming the service).

A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes the payment on March 7. The receipt of payment will involve a:

debit to cash for $1,000 credit to Accounts Receivable for $980

debit to Sales Discounts for $20 credit to Service Revenue for $980 debit to Sales Discounts for $20 (Remember that contra-revenue accounts are used here.)

A company performs $1,000 worth of services account on March 1, with the terms 2/10, n/30. The customer makes the payment on March 27. The receipt of payment will involve a:

credit to Accounts Receivable for $1,000 debit to cash for $980, credit to Sales Discounts for $20 credit to Service Revenue for $1,000 credit to Accounts Receivable for $1,000 ( Remember that the customer is paying after the discount period.)

The balances in sales discounts, returns, and allowances are subtracted from total revenues when calculating net revenues. True False True, Sales discounts, returns, and allowances are contra revenue accounts. We subtract the balances in these accounts from total revenues when calculating net revenues.

Which of the following represent a reduction in the listed price of a product or service?

Sales discounts Sales returns Trade discounts Sales allowances Trade discounts (Think of a method used by companies to provide incentives to larger customers or consumer groups to purchase from the company.)

How are trade discounts recognized?

By using contra revenue accounts By recording the sale at the discounted price By debiting the Trade Discounts account By reducing them from total revenues at the end of the period By recording the sale at the discounted price (Think of an indirect way of recording.)

Outlook corporation performed event management services worth 1.5 million in 2011. of this, 400000 remains receivable at the end of the year. In previous years, approximately 10 percent of accounts receivable were not collected; Outlook corporation decides to base this years estimate on that same percentage using the percentage-of-receivables method. The year-end adjustment to allow for these future uncollectible accounts will include: A credit to Allowance for uncollectable Accounts for 40,000

A debit to Bad Debt Expense for 40,000

(notice that this adjustment involves an increase in expenses and an indirect decrease in assets.)

The percentage-of-receivables method is sometimes referred to as the __________ method, because we base the estimate of bad debts on an amount found in this particular financial statement.

Income Statement Balance Sheet Balance Sheet

__________ has a normal credit balance.

Allowance for Uncollectible Accounts Bad Debt Expense

Allowance for Uncollectible Accounts

Under the allowance method, companies are required to estimate future uncollectible accounts and record those estimates in the current year. Estimated uncollectible accounts __________ expenses.

Increase assets and reduce Reduce assets and increase Reduce assets and increase

Writing off an account receivable will include a:

debit to Bad Debts Expense credit to Cash credit to Accounts Receivable credit to Allowance for Uncollectible Accounts credit to Accounts Receivable (Allowance for Uncollectible Accounts will be debited and Accounts Receivable will be credited to write off an accounts receivable.)

Beta Corporation wrote off $100,000 due from a specific client in March 2011. However, this client was able to make a Partial payment of $40,000 in June 2011. Recording this cash collection will involve all of the following accounts except:

Bad Debt Expense Accounts Receivable Cash Allowance for Uncollectible Accounts Bad Debt Expense (This event only affects assets and contra assets.)

Collecting cash on an account previously written off increases total assets but has no effect on net income.

True False False, Collecting cash on an account previously written off has no effect on total assets and no effect on net income.

Writing off actual bad debts and reestablishing those previous write-offs when it appears that customers will pay has no effect on net accounts receivable.

True False True, Think of the definition of net accounts receivable.

Flint Corporation has a debit balance of $2 million in its Allowance for Uncollectible Accounts before the year-end adjustment in 2012. Based on all available information at the end of 2012, Flint estimates that the allowance for uncollectible accounts should be $6 million. This can be accomplished with:

credit to Allowance for Uncollectible Accounts for $8 million credit to Allowance for Uncollectible Accounts for $6 million credit to Allowance for Uncollectible Accounts for $4 million debit to Allowance for Uncollectible Accounts for $6 million a credit to Allowance for Uncollectible Accounts for $8 million (Think of the normal balance of Allowance for Uncollectible Accounts.)

Pic for next 3 questions

What would be the balance before the year-end adjustment in 2011 in the Allowance for Uncollectible Accounts? credit balance of $5 million

What is the estimated ending balance for 2011 in the Allowance for Uncollectible Accounts? $16 million (Summing the estimated allowance for each age group results in a total estimated allowance of $16 million.)

What is the amount of year-end adjustment required in the Allowance for Uncollectible Accounts? $11 million credit (Think of the amount needed to make up the difference in balance prior to adjustment and estimated ending balance for 2011.)

Recording a write-off using the direct write-off method involves a debit to __________.

Bad Debt Expense Allowance for uncollectible accounts Bad Debt Expense

A company is using the __________, when it writes off an uncollectible amount with a debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

Direct Write-Off Method Allowance Method Allowance Method

The __________ is used for tax purposes but is generally not permitted for financial reporting.

Direct Write-off method Allowance Method

Direct Write-Off Method

Under the __________, we make no attempt to estimate future bad debts.

Direct Write-Off Method Allowance Method Direct Write-Off Method

On January 1, 2011, Data Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. It will record this transaction with a _____.

debit to Accounts Receivable for $10,000 debit to Notes Receivable for $10,000 credit to Service Revenue for $10,225 debit to Accounts Receivable for $10,225 debit to Notes Receivable for $10,000 ( Think of the face value of the note and the type of asset.)

Beta Company performed $20,000 of services on account and recorded the amount due as a typical account receivable. Over time, it became apparent that the customer would not be able to pay quickly, so Beta required the customer to sign a six-month, 11 percent promissory note on February 1, 2012. The company then reclassified the existing account receivable as a note receivable. Which of the following will result from this action?

Both assets and liabilities decrease Both assets and revenues decrease Revenues decrease and liabilities increase No impact on the accounting equation No impact on the accounting equation (Think about the type of accounts )

On January 1, 2011, Data Corporation accepts a $10,000 three-month, nine percent promissory note from one of its customers. How much interest will be collected at the maturity date of the note?

$225 $900 $75 $450 $225 (Multiply the face value with the interest percentage and the fraction of the year involved.)

On September 1, 2012, Dallas Corporation accepts a $30,000 six-month, 12 percent promissory note from one of its clients. The year-end adjustment to accrue interest revenue on December 31, 2012 will include a _____.

$300 credit to Interest Revenue $1,800 credit to Interest Revenue $1,200 debit to Interest Receivable $1,800 debit to Interest Receivable $1,200 debit to Interest Receivable (Think about the number of months for which interest will accrue in 2012.)

On September 1, 2012, 2G Corporation accepts a $100,000 six-month, nine percent promissory note from one of its clients. The transaction recorded by the company on March 1, 2013, the maturity date, will involve all of the following except _____.

debit to cash for $104,500 credit to Interest Receivable for $3,000 credit to Notes Receivable for $100,000 credit to Interest Receivable for $4,500 credit to Interest Receivable for $4,500 ( Note that this note extends over two accounting periods. There will be a year-end adjustment before maturity.)

Company A and Company B operate in the same industry and region. Compared to Company B, Company A has a low receivables turnover ratio and a correspondingly high average collection period. From this information, we can conclude that Company A is managing its receivables better than Company B.

True False False, Think of the time it takes for Company A to collect its receivables.

Net credit sales for Winner Company are $100,000 for the year. The accounts receivable account had a balance of $15,000 at the beginning of the year and $25,000 at the end of the year. What is the company's receivables turnover ratio?

2 5 4 0.2 5 ,Remember to use average accounts receivable.

Net credit sales for Turner Company are $200,000 for the year and the average accounts receivable balance is $20,000. What is the company's average collection period?

5 days 548 days 54.8 days 36.5 days 36.5 days , Average collection period = 365 ÷ 10 = 36.5 days.

The percentage increase in receivables for Petro Corporation is greater than the percentage increase in sales. Which of the following conclusions can be drawn from this information?

The average collection period will increase The receivables turnover ratio for the company will increase The company's payment terms for customers is becoming very stringent The company will see a decrease in sales returns and bad debts The average collection period will increase ( Think of the impact on key ratios.)

On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17?

a Cash 7840 Accounts Receivable 7840

b Cash 7840 Sales Discounts 160 Accounts Receivable 8000

c Cash 7840 Sales Revenue 160 Accounts Receivable 8000

d Cash 8000 Accounts Receivable 8000 b Cash 7840 Sales Discounts 160 Accounts Receivable 8000

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:

$6,540. $7,800. $7,140. $7,740. $7,740. ($238,000 x 3%) + $600 = $7,740.

When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?

A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.

A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense.

A debit to Bad Debt Expense and a credit to Accounts Receivable.

A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

On September 1, 2012, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp report during 2013?

$20. $40.

$30. $60. 20 Interest revenue = $1,000 x 12% x 2/12 = $20....