Chapter 8: Accounting for Receivables

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account receivable
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– sold something (or provided service) on accounts (with terms such as net 30)
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issues with accounts receivable
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1. Recognizing (how do we recognize A/R) 2. Valuing (how do we value A/R) 3. Disposing (how do we dispose A/R)
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types of receivable
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– account receivable: amounts that customers owe on account (30-60 days) – notes receivable: a written promise for amounts to be received + interest (60-90 days)
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what does default payment mean?
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it wasn’t paid
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A/R has future value if…
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it turns into cash (asset)
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recording an item being sold on account
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DR. A/R $100 CR. Sales $100 Dr. Cash $100 Cr. A/R $100 (will zero out A/R)
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A/R is asset on paper
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this doesn’t mean anything unless A/R turns into cash, then it has value
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bad debt
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when A/R isn’t collected
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two methods to deal with bad debt issues
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1. direct write off 2. allowance method
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direct write off
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objective: to zero it out cancel, delete, erase
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recording direct write off
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Dr. Bad Debt Expense $100 Cr. A/R $100 (zero out A/R)
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Issue of direct write off
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this method defers the recognition of bad debt
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allowance method
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estimate the uncollectible amounts before it becomes bad (or get worst)
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allowance method 2 sub methods
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1. percent based on sales 2. percent based on aging of A/R
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ADA
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Allowance for doubtful A/R
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steps
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1. estimate: the uncollectible amount (customers will not pay) 2. record: the estimate into ledger as follows: DR. bad debts expense (I/S) $100 CR. ADA (B/S) $100 3. when A/R turns into a real bad debt then WRITE OFF THE A/R vs. the ADA from step 2 (assuming the actual amount not paid is $95) DR. ADA $95 CR. A/R $95
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percentage of sales method
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sales $100,000 @ 3% = 3,000 (estimate) DR. Bad Debts Expense 3,000 CR. ADA 3,000 matching of expense with revenue; disregard of existing balance in the ADA account *method is based on credit sales number – cash has no collection issues – credit has collection issues
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percentage of receivable (aging method)
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*enter something*
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adjusting entry
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the difference between the calculated amount and the balance in ADA prior to the adjustment
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the percentage of receivable method is also known as
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aging method
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aging method is also known as
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the percentage of receivable
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aging method
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the required amount in ADA is the calculated amount – not based on matching of revenue and expense
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recovery of an uncollectible account
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zero out A/R initial entry with default payment DR. ADA $500 CR. A/R $500 recovery recording (flip it) DR. A/R $500 CR. ADA $500
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companies sell receivables for two major reason
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1. receivables may be the only reasonable source of cash 2. billing and collection are often time consuming and costly
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factoring =
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business
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sales of receivables
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a factor buys receivables from businesses and then collects the payments directly form the customers
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do exercises and problems
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exercise 8-3 exercise 8-4 problem 8-2A problem 8-3A
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The existing balance in Allowance for Doubtful Accounts is considered in computing bad debt expense in the a. percentage-of-sales basis. b. direct write-off method. c. percentage-of-receivables basis. d. percentage-of-receivables and percentage-of-sales basis.
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c. percentage-of-receivables basis. The existing balance in the Allowance for Doubtful Accounts is considered in computing bad debt expense when using the percentage-of-receivables basis. The existing balance is ignored when using the percentage-of-sales basis.
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Voight Company’s account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $1,400,000 and $70,000 (Cr.), respectively. An aging of accounts receivable indicated that $128,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is a. $128,000. b. $58,000. c. $198,000. d. $70,000.
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b. $58,000. The desired ending balance in the Allowance for Doubtful Accounts is $128,000. The current balance is $70,000, therefore the amount of the adjusting entry is $128,000 – $70,000 = $58,000.
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Which of the following approaches for bad debts is best described as a balance sheet method? a. Percentage-of-receivables basis. b. Direct write-off method. c. Percentage-of-sales basis. d. Both percentage-of-receivables and direct write-off methods.
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a. Percentage-of-receivables basis. The percentage-of-receivables basis is a balance sheet method because it emphasizes the cash (net) realizable value of accounts receivable – a balance sheet viewpoint.
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Hughes Company has a credit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. The amount of bad debt expense which should be reported for the year is a. $65,000. b. $5,000. c. $55,000. d. $60,000
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c. $55,000. The amount of bad debt expense is $55,000. By crediting Allowance for Doubtful Accounts for $55,000, the new balance will be the required balance of $60,000. This adjusting entry debits Bad Debt Expense for $55,000 and credits Allowance for Doubtful Accounts for $55,000.
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Hughes has a debit balance of $5,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on the review and aging of its accounts receivable at the end of the year, Hughes estimates that $60,000 of its receivables are uncollectible. In this situation, the amount of bad debt expense that should be reported for the year is a. $5,000. b. $65,000. c. $60,000. d. $55,000.
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b. $65,000. The amount of bad debt expense is $65,000. By crediting Allowance for Doubtful Accounts for $65,000, the new balance will be the required balance of $60,000. This adjusting entry debits Bad Debt Expense for $65,000 and credits Allowance for Doubtful Accounts for $65,000.
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Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net sales. The company uses the percentage-of-sales basis. If the Allowance for Doubtful Accounts has a credit balance of $15,000 before adjustment, what is the balance after adjustment? a. $23,000 b. $31,000 c. $15,000 d. $27,000
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d. $27,000 Net sales times the percentage expected to default equals the amount of bad debt expense for the year ($800,000 X 1.5% = $12,000). Because this adjusting entry credits Allowance for Doubtful Accounts, the balance after adjustment is $27,000 ($15,000 + $12,000 = $27,000).
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In 2015, Roso Carlson Company had net credit sales of $750,000. On January 1, 2015, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2015, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of net credit sales become uncollectible. What should be the adjusted balance of Allowance for Doubtful Accounts at December 31, 2015? a. $40,500. b. $10,050. c. $10,500. d. $22,500.
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c. $10,500. The accounts written off during the year will result in a $30,000 debit to Allowance for Doubtful Accounts. The adjusting entry for bad debts will include a $22,500 credit ($750,000 X 3%) to Allowance for Doubtful Accounts. Combining the beginning balance of $18,000 credit, the $30,000 debit and the $22,500 credit leaves a credit balance of $10,500 in the Allowance account.
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An analysis and aging of the accounts receivable of Prince Company at December 31 reveals the following data: Accounts receivable $800,000 Allowance for doubtful accounts per books before adjustment 50,000 Amounts expected to become uncollectible 65,000 The cash realizable value of the accounts receivable at December 31, after adjustment, is a. $800,000. b. $735,000. c. $685,000. d. $750,000.
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b. $735,000. Accounts Receivable less the expected uncollectible amount equals the cash realizable value of $735,000 ($800,000 – $65,000).
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Allowance for Doubtful Accounts is a. an operating expense. b. a contra asset account. c. added to Accounts Receivable on the balance sheet. d. closed at the end of the fiscal year.
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b. a contra asset account. Allowance for Doubtful Accounts is a contra asset and is deducted from Accounts Receivable on the balance sheet.
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Under the allowance method, estimated uncollectible receivables are credited to a. Accounts Receivable. b. Bad Debt Expense. c. Allowance for Doubtful Accounts. d. Uncollectible Accounts Expense.
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c. Allowance for Doubtful Accounts. Estimated uncollectible receivables are debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts.
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Writing off an uncollectible account under the allowance method requires a debit to a. Bad Debt Expense. b. Uncollectible Accounts Expense. c. Accounts Receivable. d. Allowance for Doubtful Accounts.
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d. Allowance for Doubtful Accounts. The allowance method of writing off an uncollectible account requires a debit to Allowance for Doubtful Accounts.
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The percentage-of-sales basis of estimating uncollectible a. produces a better estimate of cash realizable value. b. considers the existing balance in Allowance for Doubtful Accounts. c. results in a better matching of expenses with revenues. d. emphasizes balance sheet relationships.
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c. results in a better matching of expenses with revenues. The percentage-of-sales basis of estimating uncollectibles results in a better matching of expenses with revenues—an income statement viewpoint.
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The percentage-of-receivables basis of estimating uncollectibles a. ignores the existing balance in Allowance for Doubtful Accounts. b. results in a better matching of expenses with revenues. c. produces a better estimate of cash realizable value. d. emphasizes income statement relationships.
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c. produces a better estimate of cash realizable value. The percentage-of-receivables basis of estimating uncollectibles produces a better estimate of cash realizable value—a balance sheet viewpoint.
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The balance of the Allowance for Doubtful Accounts account at January 1 of the current year was $6,800 credit. During the year, accounts receivable in the amount of $9,000 were written off. Estimated uncollectible accounts expense for the year amounts to $7,200. The balance of the Allowance for Doubtful Accounts account to be reported on the balance sheet at year-end is a. $8,600. b. $5,000. c. $7,200. d. $14,000.
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b. $5,000. Ending balance for Allowance for Doubtful Accounts = beginning balance for Allowance for Doubtful Accounts ($6,800 credit) – current year write-offs ($9,000 debit) + current year estimated Uncollectible Accounts Expense ($7,200 credit) = $5,000.
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In recording the sale of accounts receivable, the commission charged by a factor is recorded as a. Service Charge Expense. b. Bad Debt Expense. c. Loss on Sale of Receivables. d. Commission Expense.
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a. Service Charge Expense. The commission charged by a factor is debited to Service Charge Expense when accounts receivable are sold.
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A 60-day note receivable dated April 13 has a maturity date of a. June 12. b. June 11. c. June 10. d. June 13.
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a. June 12. April 30 -13 = 17 days remaining in April + 31 days in May + 12 days in June = a maturity date of June 12.
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On February 1, Kline Company received a $6,000, 10%, four-month note receivable. The cash to be received by Kline Company when the note becomes due is a. $6,200. b. $200. c. $6,600. d. $6,000.
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a. $6,200. Maturity value = face value + total interest. Interest = $6,000 X 10% X 4/12 = $200. Therefore maturity value = $6,000 + $200 = $6,200.
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The maturity date of a 90-day note dated April 12 is a. July 11. b. July 12. c. July 13. d. July 10.
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a. July 11. The maturity date of a 90-day note dated April 12 is July 11 [18 days in April + 31 days in May + 30 days in June + 11 days in July]
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The interest rate specified in a note is for a a. day. b. month. c. week. d. year.
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d. year. The interest rate specified in a note is an annual rate of interest.
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A company that receives an interest-bearing note receivable will a. credit Notes Receivable for the face value of the notes. b. debit Notes Receivable for the maturity value of the note. c. credit Notes Receivable for the maturity value of the note. d. debit Notes Receivable for the face value of the note.
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d. debit Notes Receivable for the face value of the note. A company receiving an interest-bearing note will debit the Notes Receivable account for the face value of the note.
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When a note receivable is honored, Cash is debited for the note’s a. face value. b. maturity value. c. net realizable value. d. gross realizable value.
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b. maturity value. When a note receivable is honored, Cash is debited for the maturity value of the note, Notes Receivable is credited for the face value and Interest Revenue is credited for the difference.
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Ginter Co. holds Kolar Inc.’s $10,000, 120-day, 9% note. The entry made by Ginter Co. when the note is collected, assuming no interest has been previously accrued, is a. Cash 10,000 Notes Receivable 10,000 b. Cash 10,300 Notes Receivable 10,000 Interest Revenue 300 c. Accounts Receivable 10,300 Notes Receivable 10,000 Interest Revenue 300 d. Cash 10,300 Notes Receivable 10,300
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b. Cash 10,300 Notes Receivable 10,000 Interest Revenue 300 This is the correct entry because cash is collected (debit Cash for maturity value), the note receivable is collected (credit Notes Receivable for face value) and the amount of interest earned is recognized (credit Interest Revenue).
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For an interest-bearing note, the amount due at maturity is the a. face value of the note. b. cash (net) realizable value. c. face value of the note plus interest. d. maturity value plus interest.
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c. face value of the note plus interest. The amount due at maturity is the face value of the note plus interest for a specified length of time.

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