ACCT Ch 6

Question 1

Revenue Recognition Principle

Answer 1

requires the revenues be recorded when earned

Question 2

Rendered

Answer 2

services that have been completed prior to receiving payment

Question 3

Four Criteria for Revenue Recognition Principle

Answer 3

1. Delivery has occurred or services rendered
2. Persuasive evidence of an arrangement for customer payment like contract.
3. Price if fixed/determinable and collection is reasonably assured.
4. For sellers of goods these criteria are most often met and sales revenue is recorded when title and risks of ownership transfer to the buyer like FOB shipping point or FOB destination point.

Question 4

An example of revenue recorded when handed to USPS, FedEx, etc

Answer 4

FOB shipping point

Question 5

An example of revenue when it gets to your door

Answer 5

FOB destination point

Question 6

FOB (freight on board) shipping point

Answer 6

revenue recorded at point of shipping, because title changes hands at shipment (note: buyer normally pays for shipping

Question 7

FOB (freight on board) Destination Point

Answer 7

revenue recorded at point of destination, because title changes hands on delivery (note: seller normally pays for shipping)

Question 8

Credit Card Discounts

Answer 8

Companies accept credit cards for several reasons:
1. To increase sales
2. To avoid providing credit directly to customers
3. To avoid losses due to bad checks
4. To avoid losses due to fraudulent credit card sales (as long as the company follows the credit card company’s verification procedure, the credit card company (ex. Visa) absorbs any losses.
5. To receive payment quicker (the credit card receipts can be directly deposited in it’s bank)

Question 9

Credit Card Discount Formula

Answer 9

Credit Card Discount = sales * credit card fee rate

Question 10

Credit Card = ______

Answer 10

Cash

Question 11

Journal Entry to Record Credit Card Discount

Answer 11

Dr. Cash (+A)

Dr. Credit Card Discount (+XR, -R)

Cr. Sales Revenue (+R, +SE)

Question 12

Sales Discount/Cash Discount Definition

Answer 12

customers may be offered a sales discount to encourage early payment

Question 13

2/10, n/30 mean

Answer 13

If payment is made in 10 days the customer gets a 2% discount. Otherwise the full amount is due within 30 days

Question 14

3/5, n/45 mean?

Answer 14

If payment is made within 5 days customer gets a discount of 3%. Otherwise the full amount is due within 45 days.

Question 15

Sales Discount Formula

Answer 15

Sales Discount = Sale * Sales Discount Rate

Question 16

Sales Discount and Credit Card Discount are

Answer 16

Contra revenue accounts are Credit Card Discount/Sales Discount/Sales Returns & Allowances act like a regular Revenue account so when you
Dr. +XR, -R
If you…
Cr. -XR, +R

Question 17

JE to record sales discount

Answer 17

Dr. Cash (+A)
Dr. Sales Discount (+XR, -R)
Cr. A/R (-A)

Question 18

JE to record if the customer doesn’t make the payment within the allocated time frame for a sales discount.

Answer 18

Dr. Cash (+A) Full Amount
Cr. A/R (-A) Full Amount

Question 19

Sales Returns & Allowances Definition

Answer 19

If goods are defective, damaged, or unsatisfactory. Often accumulated in a separate account called “sales returns and allowances” and must be deducted from gross sales revenue in determining net sales

Question 20

JE to record sale for Sales Returns and Allowances

Answer 20

Dr. A/R (+A)
Cr. Sales Revenue (+R, +SE)

Question 21

JE to record return of product

Answer 21

Dr. Sales Returns & Allowances (+XR, -R)
Cr. A/R (-A)

Question 22

Income Statement for Credit Card Discount, Sales Discount, and Sales Returns & Allowances

Answer 22

Gross Sale
(Credit Card Discount)
(Sales Discount)
(Sales Returns & Allowances)
= Net Sales
(Cost of Goods Sold)
=Gross Profit/Margin

Question 23

Bad debt expense is an ______ and is recorded using the ____ principle

Answer 23

operating expense; matching

Question 24

Allowance for Doubtful Accounts (AFDA) definition

Answer 24

contra-asset account containing the estimated uncollectible accounts receivable. Allowance for Doubtful Accounts is always subtracted from the balance of the asset Accounts Receivable on the Balance Sheet

Question 25

Bad Debt Expense Definition

Answer 25

Selling, General & Administrative (SG&A) Expense in Income Statement

Question 26

What would Dr. or Cr. AFDA look like?

Answer 26

Dr. AFDA (-XA, +A) Cr. AFDA (+XA, -A)

Question 27

Allowance Method of accounting for Bad Debts

Answer 27

1. Make the end-of-period adjusting entry to record estimated bad debt expense 2. write off specific accounts determined to be uncollectible during the period--> A/R

Question 28

JE to record Bad Debt Expense

Answer 28

Dr. Bad Debt Expense (+E, -SE) Cr. AFDA (+XA, -A)

Question 29

JE to Write Off accounts determined to be uncollectible during a specific period (helps to make a table for AFDA)

Answer 29

Dr. AFDA (-XA, +A) Cr. A/R (-A) Note: only time we credit accounts receivable

Question 30

JE to Reverse a Write Off there are TWO JE

Answer 30

1st JE to first reverse to put the receivable back on the books Dr. A/R (+A) Cr. AFDA (+XA, -A) 2nd JE to record the collection of cash Dr. Cash (+A) Cr. A/R (-A)

Question 31

Income Statement Method (% of Credit Sales) for estimating Bad Debt Expense

Answer 31

JE to record Bad Debt Dr. Bad Debt Expense (+E, -SE) Cr. AFDA (+XA, -A)

Question 32

Balance Sheet Method/Aging of Accounts Receivable

Answer 32

the aging of account receivable method relies on the fact that as accounts receivable becomes older and more overdue, it is less likely that they will be collected

Question 33

JE to record Balance Sheet Method

Answer 33

Make table for AFDA the end balance should be the # you computed from the estimated amount of uncollectible accounts. Put in Beginning balance of AFDA. Debit Write offs if any. Find the missing value for that month and then record that # for a: Bad Debt Expense in JE Dr. Bad Debt Expense (+E,-SE) Cr. AFDA (-XA, +A)

Question 34

Balance Sheet Method for Bad Debt Expense

Answer 34

Beginning Balance AFDA + Bad Debt Expense - Write-Offs = Ending Balance

Question 35

How to compute balance sheet for Aging of Accounts Receivable

Answer 35

A/R (AFDA) =Net A/R