Chapter 8

Question 1

What is a recievable?

Answer 1

Claims that are expected to be collected in cash

Question 2

What are accounts recievable?

Answer 2

Amounts owed by the customer from normal business transactions of selling goods or services on credit

Question 3

What are notes receivable?

Answer 3

Claims for which formal credit arrangements between a creditor and a debtor

Question 4

What is bad debt expense?

Answer 4

When customers are not expected to pay you

Question 5

Journal entry for A/R valuation?

Answer 5

(Dr) Bad debt expense

Cr) AFDA (allowance for doubtful account

Question 6

What iss AFDA?

Answer 6

Contra AR account. This records the bad debt at the time of the sale based on an estimated percentage of uncollectibility

Question 7

Where is AR stated at?

Answer 7

Net realizable value

Question 8

Equation for net realizable value?

Answer 8

AR - allowance for doubtful accounts

Question 9

What will influence the amount uncollectible?

Answer 9

• customer credit
• company’s credit policy
• market conditions

Question 10

If a company’ credit policy to its customers is very lax (not very strict at all), then AFDA is higher or lower under the assumption that all else is equal?

Answer 10

Higher

Question 11

Three steps for account receivable?

Answer 11

Estimation
Write-off
Recovery

Question 12

Journal entry for estimation

Answer 12

(Dr) Bad debt expense

(Cr) Allowance for doubtful accounts

Question 13

Journal entry for write-off?

Answer 13

(Dr) Allowanfs for doubtful accounts

(Cr) A/R

Question 14

Journal Entry for Recovery

Answer 14

(Dr) A/R
(Cr) allowance for doubtful accounts

(Dr) Cash
(Cr) A/R

Question 15

Which account receivable event decreases assets?

Answer 15

Estimation

Question 16

How does estimation affect B/S equation?

Answer 16

Decreases assets
Decreases eqioty (net AR is lower due to increase in AFDA and bad debt expense will decrease net income amount as well)

Question 17

Assume a company uses the allowance method for bad debts. Describe the
impact that the write-off of a bad debt has on the company’s Current ratio?

Answer 17

No impact on the current ratio

Question 18

T-Account for A/R

Answer 18

(Dr) beginnign balance Credit sales, recovery = reinstatement
(Cr) Cash collection, write-off
(ending balance on Dr)

Question 19

T-Account for AFDA?

Answer 19

(Dr) Write off debts
(Cr) Beginning balance, estimated bad debts, recovery = reinstatements
(ending balance on Cr)

Question 20

What does AFDA represent?

Answer 20

The estimated amount of the future losses that you will incur when you realize that the AR are uncollectible.

Question 21

Using AFDA how could a company manage earnings upwards with respect to credit policies?

Answer 21

If you liberalize credit policies your AR and revenue is higher. Your AFDA will be higher as well but if you ignore AFDA then bad debt expense will be close to 0. In terms of income if you want higher income you want higher revenue and minimize bad debt expense. To do this you can ignore certain amounts of AFDA. So you can liberalize credits policies and ignore certain amounts of AFDA

Question 22

What are the two methods to estimate bad debt expenses?

Answer 22

(1) Percentage of credit sales (I/S approach)

2) Aging of accounts receivable (B/S approach

Question 23

How to collect bad debt expense using percentage of credit sales?

Answer 23

Bad debt expense = net credit sales * uncollectible %

Question 24

Equation for ending balance of AFDA?

Answer 24

Ending balance = beginning balance + bad debt estimation - write off

Question 25

How to calculate amount compay should report as allowance for doubtful accounts using aging methods example

Answer 25

Ending AR balance * percentage of ending AR estimated to be uncollectible Bad debt expense is above calculation - credit balance of AFDA (or plus debit balance)

Question 26

Is it possible to see a debit balance for the unadjusted | AFDA balance on the fiscal-year end date?

Answer 26

Yes

Question 27

Journal entry for sales of receivables (factoring)

Answer 27

(Dr) Cash, Service charge expense | (Cr) AR

Question 28

Difference between notes receivable and accounts receivable?

Answer 28

Notes more formal and for a longer period of time and often have an interest component

Question 29

Formula for calculating interest?

Answer 29

Face value of note * annual interest rate * time in terms of one year = interest

Question 30

A/R turnover ratio equation

Answer 30

net credit sales/average gross A/R Average gross A/R =

Question 31

Equation for average collection period?

Answer 31

Days in A/R = 365/AR turnover

Question 32

What does a lower A/R turnover ratio tell you

Answer 32

(1) Company is having difficulty collecting money from customers or (2) The company has very generous credit terms with them