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Exam 7: Accounting for Receivables

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Question 21

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Valley Spa purchased $7,800 in plumbing components from Tubman Co. Valley Spa Studios signed a 60-day, 10% promissory note for $7,800. If the note is dishonored, what is the journal entry to record the dishonored note?

A) Debit Accounts Receivable $7,930; debit Bad Debt Expense $130; credit Notes Receivable $7,800.
B) Debit Bad Debt Expense $7,930; credit Accounts Receivable $7,930.
C) Debit Bad Debt Expense $7,800; credit Notes Receivable $7,800.
D) Debit Accounts Receivable-Valley Spa $7,800; credit Notes Receivable $7,800.
E) Debit Accounts Receivable-Valley Spa $7,930, credit Interest Revenue $130; credit Notes Receivable $7,800.

F) None of the above
G) C) and E)

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Question 22

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If a 60-day note receivable is dated September 22, what is the maturity date of the note?

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Question 23

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What are some of the considerations management should make when assessing the accounts receivable turnover ratio?

Gideon Company uses the allowance method of accounting for uncollectible accounts. On May 3, the Gideon Company wrote off the $2,000 uncollectible account of its customer, A. Hopkins. On July 10, Gideon received a check for the full amount of $2,000 from Hopkins. The entry or entries Gideon makes to record the write off of the account on May 3 is: A) $\begin{array} { | l | r | r | } \hline \text { Accounts Receivable-A. Hopkins } & 2,000 & \\\hline \text { Allowance for Doubtful Accounts } & & 2,000 \\\hline\end{array}$ B) $\begin{array} { | l | r | r | } \hline \text { Allowance for Doubtful Accounts } & 2,000 & \\\hline \text { Bad debts expense } & & 2,000 \\\hline \end{array}$ C) $\begin{array} { | l | r | r | } \hline \text { Accounts Receivable-A. Hopkins } & 2,000 & \\\hline \text { Bad debts expense } & & 2,000 \\\hline \text { Cash } & 2,000 & \\\hline \text { Accounts Receivable-A. Hopkins } & & 2,000 \\\hline\end{array}$ D) $\begin{array} { | l | r | r | } \hline \text { Allowance for Doubtful Accounts } & 2,000 & \\\hline \text { Accounts Receivable-A. Hopkins } & & 2,000 \\\hline\end{array}$ E) $\begin{array} { | l | r | r | } \hline \text { Cash } & 2,000 & \\\hline \text { Accounts Receivable-A. Hopkins } & & 2,000 \\\hline\end{array}$

When using the allowance method of accounting for uncollectible accounts, the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Uniform Supply accepted a $4,800, 90-day, 10% note from Tracy Janitorial on October 17. If the note is dishonored, what entry should Uniform Supply make on January 15 of the next year?

As long as a company accurately records total credit sales information, it is not necessary to have separate accounts for specific customers.

The allowance method of accounting for bad debts requires an estimate of bad debt expense at the end of each accounting period. The two common methods to determine the estimate amount are the percent of sales method and the percent of receivables method. Explain the basic differences between the two methods.

Companies use two methods to account for uncollectible accounts, the direct write-off method and the allowance method.

A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the end of the current year, management estimated that $15,750 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance of $375. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense? A) $\begin{array} { | l | r | r | } \hline \text { Bad Debts Expense } & 15,750 & \\\hline \text { Allowance for Doubtful Accounts } & & 15,750 \\\hline\end{array}$ B) $\begin{array} { | c | r | r | } \hline \text { Bad Debts Expense } & 15,375 & \\\hline \text { Allowance for Doubtful Accounts } & & 15,375 \\\hline\end{array}$ C) $\begin{array} { | c | r | r | } \hline \text { Bad Debts Expense } & 16,125 & \\\hline \text { Allowance for Doubtful Accounts } & & 16,125 \\\hline\end{array}$ D) $\begin{array} { | c | r | r | } \hline \text { Accounts Receivable } & 15,750 & \\\hline \text { Bad Debts Expense } & 375 & \\\hline \text { Sales } & & 16,125 \\\hline\end{array}$ E) $\begin{array} { | c | r | r | } \hline \text { Accounts Receivable } & 16,125 & \\\hline \text { Allowance for Doubtful Accounts } & & 16,125 \\\hline\end{array}$ $\begin{array} { | l | r | } \hline \text { Desired balance in allowance account } & 15,750  \mathrm { credit } \\\hline \text { Current balance: } & 375  \mathrm { debit } \\\hline \text { Required: adjustment to allowance } & \$ 16,125  \mathrm { credit } \\\hline\end{array}$

The use of the direct write-off method is allowed under the materiality constraint.

Companies follow both the matching principle and the materiality constraint when applying the direct write-off method.

Uniform Supply accepted a $4,800, 90-day, 10% note from Tracy Janitorial on October 17. What entry should Uniform Supply make on December 31, to record the accrued interest on the note?

The Links Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred: $\begin{array}{|l|l|}\hline \text { Sept. } 7 & \begin{array}{l}\text { Links Company determined that the } \$ 8,000 \text { account receivable of the Rainier } \\\text { Company was uncollectible, and wrote it off. }\end{array} \\\hline \text { Oct. } 15 & \begin{array}{l}\text { Links Company determined that the } \$ 3,500 \text { account receivable of the Olympic } \\\text { Company was uncollectible and wrote it off. }\end{array} \\\hline \text { Nov. } 9 & \begin{array}{l}\text { Rainier Company paid } \$ 6,000 \text { of the amount owed to the Links } \\\text { Company. Links Company does not expect further collections from the Rainier } \\\text { Company. }\end{array} \\\hline \text { Dec. } 31 & \begin{array}{l}\text { Links Company estimates that } 1 \% \text { of its } \$ 1,900,000 \text { of credit } \\\text { sales would be uncollectible. }\end{array} \\\hline\end{array}$ Prepare the general journal entries to record these transactions. 2. If the balance of the allowance for uncollectible accounts was a $4,000 credit on January 1 of the current year, determine the balance of the allowance for uncollectible accounts at December 31 of the current year. Assume that the transactions above are the only transactions affecting the allowance for uncollectible accounts during the year.

What is the accounts receivable turnover ratio? How is it calculated and how is it used to assess financial condition?

Describe how accounts receivable arise and how they accounted for, including the use of a subsidiary ledger and an allowance account.

A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and the length of time past due is the:

On February 1, a customer's account balance of $2,300 was deemed to be uncollectible. What entry should be recorded on February 1 to record the write-off assuming the company uses the allowance method?

The formula for computing interest on a note is: Principal of the note × Annual interest rate × Time expressed in fraction of year.

The account receivable turnover measures: