Final Exam Review Ch. 7

Question 1

Define Receivable

Answer 1

An amount due from another party

Question 2

Define Accounts Receivable

Answer 2

Amounts due from customers for credit sales backed by customer’s general credit standing.

Question 3

What are the 4 reasons seller’s allow customers to use debit and credit cards?

Answer 3

1. Seller doesn’t have to choose who get credit and how much
2. To avoid risk of nonpayment
3. Quick receipt of payment
4. More payment options = more sales

Question 4

The credit card fee sellers pay _______ cash received by seller.

Answer 4

reduces

Question 5

How is the credit card expense recorded in this course?

Answer 5

As a selling expense

Question 6

What are the two ways to record bad debts expense?

Answer 6

1. The direct write-off method
2. the allowance method for noncollectable accounts

Question 7

What is the direct write off method?

Answer 7

A method that records the loss from an account noncollectable that is recorded at the time the account is determined to be uncollectable.

Question 8

What are bad debts?

Answer 8

Accounts of customer’s who don’t pay when they have promised to pay.

Question 9

What are the advantages of using the direct write-off method?

Answer 9

1. Simple
2. No estimation required

Question 10

What are the disadvantages of using the direct write-off method?

Answer 10

1. Receivable and Income Statement temporarily overstated
2. Bad debts not matched with sales
3. GAAP only allows use if it results in agreement with approximation of the allowance methods.

Question 11

What is the allowance method?

Answer 11

procedure that:
1. Estimates the bad debts with sales for the period
and/or
2. reports accounts receivable at estimated realizable value.

Question 12

In reference to the allowance method, why are losses estimated?

Answer 12

because when sales occur, sellers don’t know which customers will not pay.

Question 13

What are the advantages of the allowance method?

Answer 13

1. Records estimated Bad Debts expense in the same period of related sales.
2. Reports Accounts Receivable on balance sheet as the estimated amount to be collected.

Question 14

Define the allowance for doubtful accounts.

Answer 14

A contra asset account with a normal credit balance that approximates uncollelctible accounts receivable.

Question 15

The allowance for doubtful accounts _______ Accounts Receivable to its realizable value.

Answer 15

Reduces

Question 16

Define realizable value.

Answer 16

Expected proceeds from converting an asset to cash

Question 17

Allowance for Doubtful accounts is _________ from Accounts Receivable on the Balance Sheet.

Answer 17

subtracted.

Question 18

The allowance for doubtful accounts account is a (temporary/permanent) account.

Answer 18

Permanent

Question 19

What are the 3 ways to estimate Bad Debts for the Allowance method?

Answer 19

1. Percent of sales method
2. Percent of receivables method
3. Aging of receivables method

Question 20

What is the percent of sales method?

Answer 20

An Income Statement method for estimating bad debts for the allowance method that assumes a percentage of credit sales for a period is uncollectible.

Question 21

What is the percent of receivables method?

Answer 21

A Balance Sheet method for estimating bad debts for the allowance method that assumes a percent of a company’s receivables are uncollectible.W

Question 22

What are the 3 steps to compute percent of receivables?

Answer 22

1. Determine the current balance for allowance for doubtful accounts
2. Determine what the current balance for doubtful accounts should equal.
3. Record the entry

Question 23

What is the Aging of

Answer 23

A Balance Sheet method for estimating bad debts for the allowance method that uses several percentages are used to estimate

Question 24

How do we recover a Bad Debt?

Answer 24

1. Reverse the write-off and reinstate customer account
2. Record the collection of reinstated account.

Question 25

What are the two ways to dispose of receivables?

Answer 25

1. Selling of receivables to a finance company or bank 2. Pledging receivables for security for a loan.

Question 26

Gomez Corp. uses the allowance method to account for uncollectibles. Record the Jan. 31 write off of Green's $2,300 account. Mar. 9 receipt a $1,800 payment from Green and doesn't expect to receive anymore funds

Answer 26

Jan. 31 Allowance for Doubtful Accounts 2,300 Accounts receivable - Green 2,300 Mar. 9 Accounts receivable - Green 1,800 Allowance for Doubtful Accounts 1,800 Cash 1,800 Accounts Receivable - Green 1,800

Question 27

On August 2nd, Jun Co. receives a $6,300, 90-day, 13.5% note from Ryan Albany as payment on his $6,300 account receivable. Record the October 31 honoring of the Note.

Answer 27

Oct. 31 Cash 6,513 Note Receivable - R. Albany 6,300 Interest Revenue 213

Question 28

Warner Co.'s year-end unadjusted trail balance shows: Accounts Receivable: $112,000 Allowance for Doubtful Accounts: $950 dr balance Sales: $410,000 Uncollectibles are estimated to be 1.50% of Accounts Receivable. Prepare the Year-end AJE for uncollectibles estimation.

Answer 28

Bad Debts Expense 2,630 Allowance for Doubtful Accounts 2,630

Question 29

Dec. 1, Daw Co. accepts a $44,000, 45 day, 12% Note from a customer a. Prepare the Dec. 31 year-end AJE b. Record the honored Note

Answer 29

Dec. 31 Interest Receivable 440 Interest Revenue 440 Jan. 15 Cash 44,660 Interest Receivable 440 Interest Revenue 220 Notes Receivable 44,000

Question 30

What write-off method uses a debit to Bad Debts Expense?

Answer 30

Direct Write-off