Ch. 8 - Reporting and Analyzing Receivables

Question 1

What are uncollectible accounts receivable?

Answer 1

Sales on account have the possibility of not collecting the amounts owed from the customers.

Bad Debts (aka uncollectible accounts / credit losses) will likely arise from this.

Accrual accounting requires that a bad debts expense is recognized in the same period that the related sales revenue is reported.

Question 2

What is the allowance method?

Answer 2

Uncollectible amounts estimated and recorded at the send of each accounting period.
Allowance: estimated uncollectible accounts

Allowance for doubtful accounts: it is a contra-asset account

Bad debts expense: expected credit losses

Question 3

Carrying amount formula

Answer 3

aka. carrying value, NRV - net realizable value

Carrying amount = accounts receivable - allowance for doubtful accounts

Question 4

How to estimate collectible accounts?

Answer 4

Most companies use percentage.

a) A single percentage is applied to entire A/R balance to calculate the total allowance

b)different percentages are applied to different aged A/R amounts (ex. length of time an A/R amount is outstanding)

1. Compile aged A/R schedule by categorizing amount of A/R by number of days outstanding
2. Apply an estimated percentage of credit loss to each window of days outstanding; total the amounts of each window to calculate the required ending balance of allowance
3. Compare require ending balance of the allowance to the existing balance
4. Record adjusting journal entry

Question 5

What is the adjusting journal entry for uncollectible accounts?

Answer 5

Bad Debts Expense xxx
Allowance for doubtful accounts xxx
~record estimate of uncollectible accounts

Question 6

How to write off uncollectible accounts?

Answer 6

When collecting appears to be unlikely, an account should be written off and removed from the allowance.

Allowance for doubtful accounts and accounts receivable both need to be reduced

AFDA xxx
A/R xxx
~write off __’s account

Question 7

What is bad debt recovery?

Answer 7

If any of the previous written account is subsequently collected, two journal entries are required:

Journal Entry to reserve write-off entry

and

Journal Entry to Record Cash collected

Question 8

Journal Entry to reverse write-off entry

Answer 8

A/R xxx
AFDA xxx
~reverse write-off of _____’s account

Question 9

Journal Entry to record cash collected

Answer 9

Cash xxx
A/R xxx
~A/R collected

Question 10

What is a notes receivable?

Answer 10

It is a legal claim to assets; it is a stronger legal claim than accounts receivable

Credit Instrument that normal: (i) bears interest and (ii) extends for periods of time

Question 11

What is notes receivable often used for?

Answer 11

• When individuals and companies lend money
• When amount and/or credit period exceeds normal limits
• In settlement of accounts receivable when payment cannot be made within the established credit period

Promissory Note: written promise to pay a specific amount of money on demand or at fixed future date
Maturity Date: date on which payment in full is due

Question 12

Interest Formula

Answer 12

Interest = principal * annual interest rate * time in years

Question 13

How to record notes receivable?

Answer 13

accepted for sale

Notes rec xxx
Sales xxx

accepted for A/R

Notes rec xxx
A/R xxx

accepted for cash

notes rec xxx
cash xxx

Question 14

Recording accrued interest income

Answer 14

interest receivable xxx
interest income xxx

Question 15

Derecognizing notes receivable

Answer 15

honoured

cash xxx
notes rec xxx
interest rec xxx

dishonoured - collection expected

a/r xxx
notes rec xxx
interest rec xxx

dishonoured - not expected

bad debt exp xxx
notes rec xxx
interest rec xxx