ACG 3131 Exam 3

The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible under the allowance method

True

• Under the allowance method, uncollectible accounts are estimated in advance. When a specific account is written off, both Accounts Receivable and Allowance for Doubtful Accounts decrease by the same amount. Therefore, the net receivables do not change.

Note receivable can be either current or noncurrent assets

True

• Notes receivable are classified based on when they are due. If they are due within one year, they are current assets; if they are due in more than one year, they are noncurrent assets.

When buying receivables without recourse, the purchaser assumes the risk of collectability and absorbs any credit loss.

True

• When receivables are sold without recourse, the buyer assumes the risk of collection. If customers fail to pay, the purchaser absorbs the credit loss, not the seller.

In the gross method, sales discounts are reported when payment is made timely, as a deduction from sales.

True

• Under the gross method, sales are recorded at the full amount. If the customer pays within the discount period, the sales discount is recorded as a deduction from sales.

When buying receivables with recourse, the purchaser assumes the risk of collectability and absorbs any credit loss.

False

• When receivables are sold with recourse, the seller keeps the risk of collectability. If the customer does not pay, the seller must cover the credit loss, not the purchaser.

Trade receivables include notes receivable and advances to officers and employees.

False

• Trade receivables come from normal sales to customers (accounts receivable and notes receivable from sales). Advances to officers and employees are non-trade receviables, not trade receivables.

For receivables sold with recourse, the seller guarantees payment to the purchaser if a debtor (customer) fails to pay

True

• When receivables are sold with recourse, the seller guarantees payment if the customer fails to pay. This means the seller bears the risk of loss.

What is the normal journal entry when a previously written-off receivable is deemed collectible when using the allowance method?

Debit Accounts Receivable, Credit Allowance for Credit Losses

• Under the allowance method, when a previously written-off receivable is later deemed collectible, you restate the receivable by debiting Accounts Receivable and reducing the Allowance for Credit Losses. This reinstates the asset without affecting income.

What is the normal journal entry for recording credit loss expense under the allowance method?

Debit Credit Loss Expense, Credit Allowance for Credit Losses

• Under the allowance method, estimated uncollectible accounts are recorded by debiting an expense (Credit Loss Expense) and crediting a contra-asset (Allowance for Credit Losses), which reduces net receivables without affecting specific accounts yet.

What is the normal journal entry when writting-off an account as uncollectible under the allowance method?

Debit Allowance for Uncollectible Accounts, Credit Account Receivable

• Under the allowance method, when a specific account is determined to be uncollectible, the company reduces the receivable (credit Accounts Receivable) and uses the existing allowance (debit Allowance for Uncollectible Accounts) rather than recording an additional expense.

Formula:

What will the amount of the entry be to the Allowance for Credit Losses account when making the year end adjustment to record credit loss expense

Target Balance: Accounts Receivable x Estimated % Uncollectible

Adjustment Amount: Target Balance - Existing Credit Balance

Formula:

What will the balance be in the allowance for credit losses account after the year-end adjustment to record credit loss expense

Target Balance: Accounts Receivable x Estimated % Uncollectible

Formula:

What is gross accounts receivable at December 31st?

Ending Balance: Beginning Balance + Credit Loss Expense - Written-off Receivables

Gross Accounts Receivable: Net Realizable Value + Ending Balance.

Formula:

Net Realizable Value

Gross Accounts Receivable - Ending Balance