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  • 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.

    Sandburg Veterinarian reports the following information for the year:

    Net Credit Sales...... $120,000
    Average accounts receivable..... 20,000
    Cash collections on credit sales....... 100,000

    What is Sandburg's receivables turnover ratio?

    a. 6.0
    b. 5.0
    c. 1.2
    d. 0.2

    6.0
    Net Credit Sales / Avg. A/R
    120,000 / 20,000 = a. 6.0

    A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers.

    True
    False

    False

    Outdoor Expo provides guided fishing tours. The company charges $290 per person but offers a 10% discount to parties of four or more. Consider the following transactions during the month of May.


    May 2 Charlene books a fishing tour with Outdoor Expo for herself and four friends at the group discount price ($1,305 = $261 × 5). The tour is scheduled for May 7.

    May 7 The fishing tour occurs. Outdoor Expo asks that payment be made within 30 days of the tour and offers a 4% discount for payment within 15 days.

    May 9 Charlene is upset that no one caught a single fish and asks management for a discount. Outdoor Expo has a strict policy of no discounts related to number of fish caught.

    May 15 Upon deeper investigation, management of Outdoor Expo discovers that Charlene's tour was led by a new guide who did not take the group to some of the better fishing spots. In concession, management offers a sales allowance of 20% of the amount due.

    May 20 Charlene pays for the tour after deducting the sales allowance.

    Record the necessary transaction(s) for Outdoor Expo on each date.

    May 2 she is just booking so no entry required

    May 7 Debit accounts receivable for trade discount (1305) and
    credit Tour Revenue because this is when the tour occurs.

    May 9 She is just upset nothing required

    May 15 Debit Sales allowance (.20 x 1305=261) and credit accounts recievable (261) because you are going to recieve less money.

    May 20 She is actually paying so credit accounts receivable for the amount owed minus the sales allowance (261) -she no longer owes. Then debit sales discounts and cash together because sales discounts is a contra-asset. sales discounts should be .04 x 1044=42, and the rest is cash. so 42-1044 is 1002. Debit cash 1002. Everything balances out.

    May 2 Charlene books a fishing tour with Outdoor Expo for herself and four friends at the group discount price ($1,305 = $261 × 5). The tour is scheduled for May 7.

    May 7 The fishing tour occurs. Outdoor Expo asks that payment be made within 30 days of the tour and offers a 4% discount for payment within 15 days.

    May 9 Charlene is upset that no one caught a single fish and asks management for a discount. Outdoor Expo has a strict policy of no discounts related to number of fish caught.

    May 15 Upon deeper investigation, management of Outdoor Expo discovers that Charlene's tour was led by a new guide who did not take the group to some of the better fishing spots. In concession, management offers a sales allowance of 20% of the amount due.

    May 20 Charlene pays for the tour after deducting the sales allowance.

    Calculate Net Sales...

    1002, it is what you received in cash back when it was paid on may 20th

    May 2 Charlene books a fishing tour with Outdoor Expo for herself and four friends at the group discount price ($1,305 = $261 × 5). The tour is scheduled for May 7.

    May 7 The fishing tour occurs. Outdoor Expo asks that payment be made within 30 days of the tour and offers a 4% discount for payment within 15 days.

    May 9 Charlene is upset that no one caught a single fish and asks management for a discount. Outdoor Expo has a strict policy of no discounts related to number of fish caught.

    May 15 Upon deeper investigation, management of Outdoor Expo discovers that Charlene's tour was led by a new guide who did not take the group to some of the better fishing spots. In concession, management offers a sales allowance of 20% of the amount due.

    May 20 Charlene pays for the tour after deducting the sales allowance.


    Show how Outdoor Expo would present net sales in its income statement.....

    At the end of the year, Dahir Incorporated's balance of allowance for uncollectible accounts before adjustment is $1,400 (debit). The company estimates future uncollectible accounts to be $9,200.


    What is the adjustment Dahir would record for allowance for uncollectible accounts?

    You need to add last years unpaid amounts (1400) to the future estimated unpaid amount (9200) 1400+9200=10600. this is the total amount that is estimated not to be paid when you start out in the next year. So you debit bad debt expense for 10600 and credit allowance for uncollectible accounts (what someone will owe you, but probably not pay) for 10600.

    At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $13,000. By the end of the year, actual bad debts total $16,400.

    Record the write-off to uncollectible accounts.

    Debit Allowance for uncollectible amounts for 16400 because you just found out that the person cant pay 16,400 for sure. Credit accounts recivable for 16,400 because you are reducing the amount you will recieve from this customer in the future. (you know for sure he/she is not paying because of the actual bad debts info)

    At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $13,000. By the end of the year, actual bad debts total $16,400.

    Following the write-off, what is the balance of allowance for uncollectible accounts? Debit balance should be indicated by a minus sign.

    Allowance for uncollectable amounts debit -3400
    13,000 (current year estimate) minus 16,400 (the actual bad debts) is -3400.

    At the end of the year, Mercy Cosmetics' balance of allowance for uncollectible accounts is $500 (credit) before adjustment. The balance of Accounts Receivable is $20,000. The company estimates that 15% of accounts will not be collected over the next year.

    What adjustment would Mercy Cosmetics record for allowance for uncollectible accounts?

    Debit Bad debt expense 2500
    Credit Allowance for uncollectible accounts 2500

    Bad debts = $(20,000 × 15%) - $500 = $2,500

    At the end of the year, Dahir Incorporated's balance of allowance for uncollectible accounts is $2,000 (credit) before adjustment. The company estimates future uncollectible accounts to be $10,000.


    What adjustment would Dahir record for allowance for uncollectible accounts?

    Bad debts = $10,000 - $2,000 = $8,000
    Debit 8000 to Bad Debt Expense
    Credit 8000 to Allowance for uncollectible accounts

    Barnes Books allows for possible bad debts. On May 7, Barnes writes off a customer account of $5,300. On September 9, the customer unexpectedly pays the $5,300 balance.


    Record the cash collection on September 9.

    you need to do two entries.
    1. Debit accounts recievable 5300, and Credit allowance for uncollectable amounts 5300. The first entry reverses a portion of the previous entry that the customer made on May 7 to write off the account.

    2.Debit Cash 5300 (he unexpectantly payed), and Credit Accounts receivable 5300 (he doesnt owe anymore). The second entry records the collection of the account receivable.

    On December 1, 2012, Liang Chemical provides services to a customer for $106,800. In payment for the services, the customer signs a three-year, 12% note. The face amount and all interest are due at the end of the third year.


    Record the acceptance of the note on December 1, 2012.

    Debit Notes Recievable for 106,800 and Credit Service Revenue for 106,800.

    On December 1, 2012, Liang Chemical provides services to a customer for $106,800. In payment for the services, the customer signs a three-year, 12% note. The face amount and all interest are due at the end of the third year.


    Record the adjustment for interest revenue on December 31, 2012, 2013, and 2014.

    Find out how much interest for the time period from Decemnber 1 to December 31 (106800 x .12 x 1/12)=1068

    Find out how much for the next two years (106800 x .12)=12816

    On December 1, 2012, Liang Chemical provides services to a customer for $106,800. In payment for the services, the customer signs a three-year, 12% note. The face amount and all interest are due at the end of the third year.



    Record the cash collection on December 1, 2015

    You are recieving cash so you need to debit cash for the total amount.
    Since the person is paying, you need to credit interest recievable-interest owed, interest revenue (you have some more for 11 more months, the period from dec 31 2014 to dec 1 2015, 106800 x .12 x 11/12=11748) , and notes recievable-the origonal amount owed.

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