MGMT 200: Purdue University- Chapter 5

Accounts (Trades) Receivable

Cash owed to the company by its customers from sales or services on account.

Recognize Revenue/Accounts Receivable

Provide service or ship/deliver a product, Firm selling price, Cash collection is probable

Firm selling price

Not going to record revenue until customer has agreed to a price for my service

Cash collection is probable

Deferred recording revenue until cash is received

Nontrade

Receivables that originate from sources other then customer

Notes Receivable

Formal credit arrangements evidence by written debt instrument (includes interest (cost of money))

Trade Discounts

Reduction in list price of a product or service:

Used to provide incentives to larger customers or certain consumer groups, Recognized by recording revenue or lower amount, To record a $1,000 credit sale with a 20% trade discount

Sales Return

Customer returns a product:

Seller issues a cash refund if original sale was for cash, Seller reduces balance of accounts receivable if original sale was on account

Sales Allowances

Customer does NOT return a product:

Seller issues a cash refund if original sale was for cash, Seller reduce balance of accounts receivable if original sale was on account

Trade allowances

Record the net income

Sales returns and allowances

Use contra account

Sales discount

Offer a customer a reduction if payment is made within a specified period of time

How are sales discounts recorded

as a contra revenue account

Allowance Method

Some accounts receivable will not be collected

In allowance method companies are required to:

Estimate future noncollectable accounts, Record estimates in the current year (matching principle)

In allowance method estimated noncollectable accounts:

Reduce assets (contra asset account), Increase expenses (bad debt expense)

Percentage-of-receivables method

Bases the estimate of bad debt on a balance of accounts receivable

Net realizable value (NRV)

expected cash receipts

matching principle

expenses recorded in same period as related revenue (sales)

Record estimated uncollectible accounts as a

Contra asset account

Aging method

Considers the age of receivables, More accurate than using single percentage, The aging schedule estimates uncollectible accounts.

Write off

Customer unable to pay $1,000 accounts receivable balance

Direct write off method

Write off bad debts only at the time they actually become uncollectible, Unlike the allowance method, which requires estimation of uncollectible accounts before they even occur, Used in U.S. income tax reporting.

Notes receivable

written agreement, amount (face value), pays interest, due date (maturity date), Balance sheet classification

recording notes receivable

interest is earned over the term of the note

collection of notes receivable

at note due date, we record the collection of the note and interest earned (revenue)

interest revenue recorded in two accounting periods

at maturity date, the face value of the note and the interest are collected

receivables turnover ratio

number of times during a year the average accounts receivable balance is collected

turnover ratio equation

net credit sales/average accounts receivable

average collection period

number of days the average accounts receivable balance is outstanding

average collection period equation

365 days/receivables turnover ratio

percentage-of-credit-sales method allowance for uncollectible accounts

estimates uncollectible accounts based on a historic loss percentage of credit sales-income statment method, adjusts the allowance for uncollectible accounts for the current year's credit sales that we don't expect to collect

the amount of cash owed to a company by its customers from the sale of products or services on accounts is commonly referred to as:

A. Income

B. Accounts receivable

C. Revenue

D. Sales

b.

the ending balance of the accounts receivable account was 10,000. services billed to customers for the period were 20,000, and collections on account from customers were 25,000. what was the beginning balance of accounts receivable?

A. $30,000

B. $15,000

C. $10,000

D. $20,000

b.

Identify the likely disadvantage(s) of extending credit to

customers

A. Lower profitability

B. Lower revenues

C. Delay or failure to collect cash

D. All of the other answers are disadvantages of

extending credit to customers

c.

A sales allowance is recorded as a debit to Accounts

Receivable and a credit to Sales Allowances.

A. True

B. False

b.

Cotswolds Company has the following information:

total revenues 800,000

sales returns and allowance 50,000

sales expenses 20,000

ending inventory 100,000

What is the amount of net revenues for Cotswolds?

A. $630,000

B. $730,000

C. $750,000

D. $870,000

c.

Burford Inc. shipped the wrong color of paint to a

customer. The customer agreed to keep the paint after

being offered a 10% price reduction. The price

reduction is an example of a

A. sales discount.

B. sales return.

C. sales allowance.

D. sales expense.

c.

Trade discounts represent a discount offered to the

purchasers for quick payment.

A. True

B. False

b.

Witney Company has the following information:

total revenues 1,000,000

returns and allowances 100,000

sales discounts 50,000

sales expenses 100,000

What is the amount of net revenues for Witney?

A. $750,000

B. $850,000

C. $900,000

D. $1,000,000

b.

A company purchased $5,250 of merchandise on May 1

with terms of 2/10, n/30. On May 6, it returned $250

of that merchandise. On May 8, it paid the balance

owed for merchandise taking any discount it is entitled

to. The cash paid on May 8 is

A. $250

B. $4,000

C. $4,900

D. $5,000

E. $5,250

c.

If a company has total revenues of $100,000, sales

discounts of $5,000, sales returns of $10,000, and sales

allowances of $15,000, the income statement will

report net revenues of $75,000.

A. True

B. False

b.

One advantage of the allowance method for

accounting for uncollectible accounts is that the

company reports

A. which customer accounts are uncollectible.

B. fewer bad debts from customer receivables.

C. bad debt expense in the same period as the

credit sale.

D. greater total cash collected from customers

c.

Cambridge, Inc. estimates uncollectible accounts based

on the percentage of accounts receivable. What effect

will recording the estimate of uncollectible accounts

have on the accounting equation?

A. Decrease assets and decrease liabilities

B. Decrease assets and decrease stockholders'

equity

C. Increase liabilities and decrease stockholders'

equity

D. Increase assets and decrease stockholders' equity

b.

A company's Accounts Receivable balance at its December 31

year‐end is $125,000, and its Allowance for Doubtful Accounts

has a credit balance of $300 before year‐end adjustment. It

estimates that 4% of outstanding accounts receivable are

uncollectible. What amount of bad debt expense is recorded at

December 31?

A. $22,880

B. $300

C. $5,000

D. $4,700

E. $22,580

d.

When a company, using the allowance method, writes off a

specific customer's account receivable from the accounting

system, how many of the following are true?

• Total stockholders' equity remains the same.

• Total assets remain the same

• Total expenses remain the same

A. none

B. one

C. two

D. three

d.

J&L Corporation uses the allowance method to account for

uncollectible receivables. At the beginning of the year, the

Allowance for Doubtful Accounts had a credit balance $1,000.

During the year J&L wrote off uncollectible receivables of $2,100

In addition, J&L recorded during the year Bad Debt Expense of

$2,700. What is J&L's year‐end balance in Allowance for

Doubtful Accounts?

A. $1,600

B. $4,800

C. $3,700

D. $600

a.

At the end of the fiscal year, before adjusting entries,

Accounts Receivable has a balance of $100,000 and

Allowance for Doubtful Accounts has a debit balance of

$2,500. If the estimate of uncollectible accounts

determined by the aging of receivables is $8,500, the

amount of bad debts expense is:

A. $2,500

B. $6,000

C. $8,500

D. $11,000

d.

Bexley Corporation creates the following accounts receivable

aging report at the end of the year:

Less than 30

days $6,000 X 5% $300

31‐60 days $4,000 X 10% $400

61+ days $2,000 X 25% $500

$1,200

Prior to adjusting entries, the Allowance for Uncollectible

Accounts has a debit balance of $500. The year‐end adjustment

would include a

A. Credit to Allowance for Uncollectible Accounts for $1,200

B. Debit to Bad Debt Expense for $700

C. Debit to Bad Debt Expense for $1,700

D. Debit to Bad Debt Expense for $1,200

c.

A company, using the allowance method of recording credit losses,

wrote off a customer's account in the amount of $1,000. Later, the

customer paid the account. The company reinstated the account

by means of a journal entry and then recorded the collection.

What is the result of these procedures?

A. Increase in total assets by $1,000

B. Decrease total assets by $1,000

C. Decreases total assets by $2,000

D. Has no effect on total assets

d.

The direct write‐off method is used for tax purposes

but is not permitted for financial reporting

A. True

B. False

a.

At the end of 2017, Norton Corporation had a

balance in its Allowance for Uncollectible Accounts

of $4,500 (credit) before any adjustment. Norton

estimated its future uncollectible accounts to be

$12,000 using the percentage‐of‐receivables

method. Norton's adjustment on December 31,

2017, to record its estimated uncollectible accounts

included a:

A. Credit to Allowance for Uncollectible

Accounts of $12,000

B. Credit to Bad Debt Expense of $7,500

C. Credit to Allowance for Uncollectible

Accounts of $16,500

D. Debit to Bad Debt Expense of $7,500;

credit to Allowance for Uncollectible

Accounts of $7,500

d.

At December 31, Bampton Co. reported accounts receivable of

$238,000 and an allowance for uncollectible accounts of $600

(debit) before any adjustments. 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

A. $6,540

B. $7,740

C. $7,800

D. $7,140

b.

On September 1, 2017, Langdon 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 Langdon Corp. report during 2017?

A. $60

B. $40

C. $20

D. $30

b.

A company accepts a note receivable of $5,000 on

September 1, 2018, that matures in 10 months and has

stated interest of 6%. What amount of interest revenue

will the company record in 2018 and 2019?

A. 2018 = $100; 2019 = $150

B. 2018 = $125; 2019 = $125

C. 2018 = $150; 2019 = $100

D. 2018 = $0; 2019 = $250

a.

If the receivables turnover ratio decreased during the

year,

A. the days to collect also decreased.

B. receivables collection slowed down.

C. sales revenues increased at a faster rate that

accounts receivables increased.

D. none of the above.

b.

Camelot, Inc. has an accounts receivable turnover of

ten. What is the company's average collection period?

A. 36.0

B. 30.8

C. 34.6

D. 36.5

d.

Even though the percentage‐of‐receivables method

and the percentage‐of‐credit‐sales method use

different accounts to estimate future uncollectible

accounts, the amount of bad debt expense reported in

the income statement will always be the same under

the two methods.

A. True

B. False

b.

Dover Corporation uses the allowance method to record its

expected credit losses. It estimates its losses at one percent of

credit sales, which were $750,000 during the year. The Accounts

Receivable balance was $220,000 and the Allowance for

Doubtful Accounts had a credit balance of $1,000 before

adjustment at year‐end. What amount is the debit to the Bad

Debt Expense.

A. $7,500

B. $8,500

C. $6,500

D. $3,200

a.