Accounting Chapter 9

Account Receivable

A claim against the customer created by selling merchandise or services on credit

Accounts Receivable Turnover

The relationship between net sales and accounts receivable, computed by dividing the net sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash

Aging the Receivables

The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age

Allowance for Doubtful Accounts

The contra asset account for accounts receivable

Allowance Method

The method of accounting for uncollectible accounts that provides an expense for uncollectible receivables in advance of their write-off

Bad Debt Expense

The operating expense incurred because of the failure to collect receivables

Direct Write-Off Method

The method of accounting for uncollectible accounts that recognizes the expense only when accounts are judged to be worthless

Dishonored Note Receivable

A note the maker fails to pay on the due date

Maturity Value

The amount that is due at the maturity or due date of a note

Net Realizable Value

The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions

Notes Receivable

A customers written promise to pay an amount and possibly interest at an agreed upon rate

Number of Days’ Sales in Receivables

The relationship between sales and accounts receivable, computed by dividing the net accounts receivable at the end of the year by the average daily sales

Receivables

All money claims against all other entities, including people, business firms, and other organizations

Notes and accounts receivable that result from sales transactions are sometimes called

d. trade receivables.

An account receivable due in 12 months is listed on the balance sheet under the caption

d. current assets.

A note receivable due in 12 months is listed on the balance sheet under the caption

d. current assets.

The rule is that an account becomes uncollectible

b. There is no general rule as to when an account becomes uncollectible. Deciding when an account is uncollectible is not hard and fast. It generally takes multiple factors to confirm that an account is uncollectible.

The direct write-off method is

d. for federal income tax purposes.

Under the allowance method of accounting for uncollectible accounts, Bad Debts Expense is debited

c. at the end of each accounting period. The direct write-off method does not accrue bad debt expense in the period the sale is made. It records it at the point of default.

If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited when a customer’s account is written off as uncollectible?

a. Accounts Receivable The correct entry includes a debit to bad debt expense and a credit to the specific customer’s accounts receivable account.

Which of the following methods and bases of accounting for uncollectible accounts receivable is inconsistent with the proper application of matching?

c. Direct write-off method

A primary weakness of the direct write-off method is that

a. the expense of a bad debt is not matched to the period that generated the uncollectible sale amount.

Under the allowance method, when a specific account is written off

c. total assets will be unchanged. Under the allowance method, when a specific account is written off, the allowance account is debited and the accounts receivable account is credited.

Flora Co. uses the allowance method of accounting for uncollectible accounts receivable. The entry to write off an account that has been determined to be uncollectible would be as follows:

c. debit Allowance for Doubtful Accounts; credit Accounts Receivable.

Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and uncollectible accounts expense is estimated at 2% of sales. If sales are $600,000, the amount of the adjusting entry to record the provision for doubtful accounts is

d. $12,000.

When comparing the direct write-off and allowance methods, which of the following statements applies to the direct write-off method?

a. The expense is recognized when the account is written off rather than in the period of sale. The direct write-off method does not use an allowance account and is typically used by small companies with few receivables. When an account is deemed uncollectible, it is directly expensed at that point.

When comparing the direct write-off and allowance methods, which of the following statements applies to the allowance method?

c. The result is based on either (1) a percentage of sales or (2) an analysis of receivables. When using the allowance method, the expense is estimated in the period of the sale by using either the percentage of sales method or an analysis of receivables and is recorded in an allowance (contra asset) account. Primary users of the allowance method are large companies and companies with a large amount of receivables.

If Modern Company received $3,650 from Connor Young Company on March 12 for the total amount of an account which had been written off on March 1, the entry to record the cash receipt after the account has been reinstated under the direct write-off method

c. is the same as it would be under the allowance method. The journal entry to record the receipt of cash after the account has been reinstated is the same under both the direct write-off and allowance methods. Cash: debit of 3,650 Accounts Receivable – Connor Young: credit of 3,650

The maturity value of a promissory note is

a. the face value of the note plus the interest due to the maturity date.

The journal entry to record a note received from a customer to apply on account is

debit Notes Receivable; credit Accounts Receivable

A 60-day, 12% note for $10,000, dated May 1, is received from a customer on account. Assuming a 360-day year, the maturity value of the note is

d. $10,200. The maturity value of a note is the face amount plus interest. This is calculated as $10,000 + [$10,000 × 12% x (60/360)] = $10,200.

Receivables are _________ on the __________, which are listed in order of ____________.

c. current assets; balance sheet; liquidity

All receivables that are expected to be realized within a year are reported in the __________ section of the balance sheet.

a. current assets All receivables that are expected to be realized within a year are reported in the current assets section of the balance sheet.

Other disclosures related to receivables are reported

c. either on the face of the financial statements or in the financial statement notes.

Financial statement data for the year ending December 31 for Gore Co. is as follows:

Sales $4,250,000
Accounts receivable:
Beginning of year 600,000
End of year 630,000

Determine accounts receivable turnover for the year.

d. 6.91 $4,250,000 / [($600,000 + $630,000) / 2] = 6.91

The numerator in the number of days’ sales in receivables calculation is

b. None of these choices are correct. a. accounts receivable ending balance. c. accounts receivable beginning balance. d. average daily sales. The denominator in the number of days’ sales in receivables calculation is average daily sales.

Using the following end-of-year information, calculate the number of days’ sales in receivables for Year 2.? Year 2: sales are $82,500; average accounts receivable is $11,000. Year 1: sales are $78,000; average accounts receivable is $10,000. Round to one decimal place.

c. 48.7 $82,500/365 = 226.0; $11,000/226.0 = 48.7, which is the number of days’ sales in receivables for Year 2.

The estimate of uncollectible accounts is based on​ all of the following except

c. monthly cash expenses.

Other receivables do not include

d. trade receivables.

Companies may sell their receivables. This practice is called

a. factoring

Establishing an Allowance for Doubtful Accounts under the allowance method is necessary because

d. estimates must be made when recording bad debt expense and it is not possible to know which specific accounts will not be collected.

The direct write-off method records bad debt expense

The direct write-off method is used by all of the following businesses except

Under the direct write-off method, when a specific account is written off

b. total assets will decrease.

Two financial measures that are especially useful in evaluating efficiency in collecting receivables are the

a. accounts receivable turnover and the number of days’ sales in receivables.

The Allowance for Doubtful Accounts is

d. subtracted from Accounts Receivable

A 90-day, 12% note for $10,000, dated May 1, is received from a customer on account. Assuming a 360-day year, the maturity value of the note is

c. $10,300.

If Ohio Company received $2,250 as partial payment on the $5,500 account of Carson Mueller Company and wrote off the remaining balance as uncollectible, the only difference between recording the entry under the direct write-off method and the allowance method (assuming that an adequate allowance account had been set up) would be:

c. a debit to Bad Debt Expense for $3,250 under the direct method rather than a debit to Allowance for Doubtful Accounts for $3,250 under the allowance method.

Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and an analysis of accounts in the customer ledger indicates doubtful accounts of $15,000. Which of the following entries records the proper provision for doubtful accounts?

a. Debit Bad Debt Expense, $14,500; credit Allowance for Doubtful Accounts, $14,500. Expenses increase with debits. In addition, $500 represents the credit balance in the Allowance for Doubtful Accounts at the end of the year (before adjustment), and an analysis of accounts in the customer ledger indicates doubtful accounts of $15,000.

The direct write-off method is used by all of the following businesses except

a. those that have receivables as a large part of their current assets. the direct write-off method is used by businesses that sell most of their goods and services for cash or MasterCard or Visa.

Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and Bad Debt Expense is estimated at 2% of sales. If sales are $500,000, the adjusting entry for uncollectible accounts would include:

d. a credit to Allowance for Doubtful Accounts of $10,000.

If Modern Company received $3,650 from Connor Young Company on March 12 for the total amount of an account which had been written off on March 1, the entry to reinstate the account under the allowance method would include:

b. a credit to Allowance for Doubtful Accounts of $3,650.

The number of days’ sales in receivables is determined by dividing

a. average accounts receivable by average daily sales. Number of Days’ Sales in Receivables = Average Accounts Receivable / Average Daily Sales

On December 1, Bright Company receives a 6% interest-bearing note from Galvalume Company to settle a $20,000 account receivable. The note is due in 3 months. At December 31, Bright should record interest revenue of

$100.

The number of days’ sales in receivables

d. is an estimate of the length of time the receivables have been outstanding.