Lecture on Receivables and Bad Debts

These flashcards cover key concepts related to receivables, provided in the lecture notes, including definitions, methods, and accounting treatments.

What is a receivable?

A receivable is a monetary claim against a business or an individual, representing a right to receive cash in the future from a current transaction.

Who is a creditor?

A creditor is the party who receives a receivable.

What represents the right to receive cash from customers for goods or services performed?

Accounts receivable, also called trade receivables.

What are notes receivable?

Notes receivable usually have longer terms than accounts receivable and represent a promise to pay a fixed amount of principal plus interest by a certain due date.

What is bad debt expense?

The operating expense recorded from uncollectible receivables.

What is the direct-write off method?

It records bad debt expense ONLY at the exact time when an account is determined to be worthless.

What does the allowance method estimate?

It estimates the total uncollectible receivables at the end of the period.

What is the maturity date of a note receivable?

The maturity date is the date on which a note receivable is due.

How does one calculate interest on a note?

Interest is calculated as Face Amount × Interest Rate × (Term ÷ 360 days).

What is net realizable value (NRV)?

NRV is the amount of receivables a business expects to collect out of their total accounts receivable.

What happens when a note is dishonored?

The face amount of the note plus any interest due are transferred back to the customer’s accounts receivable.

How are estimated uncollectible accounts determined in the aging of receivables method?

By analyzing how long individual receivables from specific customers have been outstanding.

What is the difference between the percent of sales method and the analysis of receivables method?

The percent of sales method emphasizes the income statement, while the analysis of receivables method emphasizes the balance sheet.

What is included in the Allowance for Doubtful Accounts?

It is a contra asset account that reduces accounts receivable to net realizable value.

What is reported on the balance sheet regarding accounts receivable?

Accounts receivable are reported as current assets, net of the allowance for uncollectible accounts.

Problem 1: Prepare Journal Entry for Credit Sales

A company sells goods worth $5,000 on credit. Prepare the journal entry for this transaction.

Problem 2: Aging Analysis of Accounts Receivable

A company has the following accounts receivable: $2,000 (current), $1,000 (1-30 days past due), $500 (31-60 days past due), and $300 (over 60 days past due). Prepare an aging analysis and estimate the allowance for doubtful accounts assuming a 5% uncollectible rate.

Problem 3: Calculate Receivables Turnover Ratio

If a company has net credit sales of $300,000 and average accounts receivable of $50,000, calculate the receivables turnover ratio.

Problem 4: Estimating Bad Debts Using Percentage of Sales

A company estimates that 3% of its sales will be uncollectible. If it has total credit sales of $200,000 this month, how much should it record as bad debt expense?

Problem 5: Recording Cash Collections from Accounts Receivable

A company collects $4,000 from outstanding accounts receivable. Prepare the journal entry for the cash collection.