Accounting Chapter 5.2 Flashcards

Questions and Answers

The allowance method is required by GAAP for financial reporting purposes.

True

The allowance method requires managers to estimate future uncollectible accounts and to record that estimate in the current year.

True

The company's estimate of uncollectible accounts is:

$600

If Kimbrough Corporation estimates that 20% of the total year-end accounts receivable will not be collected, what will it record?

credit to Allowance for Uncollectible Accounts for $1 million Signup and view all the answers

Account(s) with a normal credit balance include: (Select all that apply.)

Sales Revenue Signup and view all the answers

Estimated uncollectible accounts do what to assets and do what to net income?

decrease total assets and decrease net income Signup and view all the answers

To record acceptance of a $10,000 three-month, nine percent promissory note, what will Boyd Corporation record?

debit to Notes Receivable for $10,000 Signup and view all the answers

No impact on the accounting equation results from reclassifying an account receivable as a note receivable.

True Signup and view all the answers

How much interest will be collected at the maturity date of a $10,000 three-month, nine percent promissory note?

$225 Signup and view all the answers

The entry to record the collection of a $5,000 six-month, five percent promissory note at maturity will include a:

credit to Interest Revenue for $125 Signup and view all the answers

The year-end adjustment to accrue interest revenue for a $30,000 six-month, 12 percent promissory note will include a:

$1,200 credit to Interest Revenue Signup and view all the answers

On maturity date, the transaction recorded by Sigma Corporation for a $100,000 six-month, nine percent promissory note will involve:

debit to Cash for $104,500, credit to Interest Receivable for $3,000, credit to Notes Receivable for $100,000 Signup and view all the answers

A company's decision to offer discounts for early payment has the potential to increase sales volume, but comes at the cost of slower cash collection.

False Signup and view all the answers

What is Winner Company's receivables turnover ratio?

5.0 Signup and view all the answers

What is the average collection period for Turner Company?

36.5 days Signup and view all the answers

If the percentage increase in receivables for Petro Corporation is greater than the percentage increase in sales, what conclusion can be drawn?

The average collection period will increase Signup and view all the answers

Company A is managing its receivables better than Company B if it has a low receivables turnover ratio and a correspondingly high average collection period.

False Signup and view all the answers

Net Revenues are defined as:

total revenues, less contra revenues Signup and view all the answers

Sales discounts refer to:

reduction in revenue when the customer pays within a specified time period Signup and view all the answers

Net realizable value is defined as:

the difference between total AR and the estimate of future uncollectible accounts Signup and view all the answers

Sales returns refer to:

reduction in revenue because the customer brings back products to the company after the original purchase Signup and view all the answers

Sales allowances refer to:

reduction in revenue because of some deficiency in the company's product Signup and view all the answers

Contra-revenue accounts have:

balances opposite of revenue Signup and view all the answers

The allowance method is:

the procedure required for financial reporting purposes to account for uncollectible accounts Signup and view all the answers

Trade discounts refer to:

reduction in revenue because the product is sold below the listed price Signup and view all the answers

When using an aged method for estimating uncollectible accounts, older accounts are considered less likely to be collected.

True Signup and view all the answers

What is the amount of interest revenue reported in Dots Inc's 2018 income statement for lending $100,000 at 3%?

$750 Signup and view all the answers

Record the adjusting entry for uncollectible accounts for Physicians' Hospital on December 31, 2021, for $47,000 Accounts Receivable.

debit bad debt expense $5,950, credit allowance for uncollectible accounts $5,950 Signup and view all the answers

Record the acceptance of the note receivable and the cash collection for Terrell & Associates for the services provided to Whole Grain Bakery.

March 1: debit notes receivable $9,800, credit service revenue $9,800; Sept 1: debit Cash $10,290, credit NR $9,800, credit Interest revenue $490 Signup and view all the answers

Study Notes

Allowance Method

Required by GAAP for financial reporting to estimate future uncollectible accounts.
Managers must record estimates in the current year impacting financial statements.

Uncollectible Accounts Estimates

Estimated uncollectible accounts reduce both total assets and net income.

Accounts Receivable and Promissory Notes

Ellison, Inc. estimated $600 uncollectibles from $18,000 billed; 10% of receivables.
Kimbrough Corporation projected $1 million uncollectibles from $5 million receivables; 20% estimation.
Promissory notes recorded as Notes Receivable; Boyd Corporation recorded a debit for $10,000 on acceptance.

Interest Revenue

Interest on a note is calculated and recognized at maturity.
Alpha Corporation will collect $225 in interest on a $10,000 note.
Dallas Corporation accrued $1,200 for interest revenue on a $30,000 note at year-end.

Collection of Notes

Sigma Corporation expects a total of $104,500 upon maturity of a $100,000 note, including $3,000 in interest.
Sept 1 note collection entry includes crediting Interest Revenue for $125 from a $5,000 note.

Discounts and Net Revenues

Discounts for early payment can potentially increase sales without delaying cash collection.
Net Revenues calculated as total revenues less contra revenues.

Sales Adjustments

Sales discounts reduce revenue due to early payment incentives.
Sales returns and allowances account for revenue reduction from product returns and deficiencies.

Receivables Management

Receivables turnover ratio for Winner Company is 5.0, indicating efficiency in collecting receivables.
Average collection period for Turner Company computed at 36.5 days, reflecting time taken to collect credit sales.
An increase in the average collection period may indicate worsening customer payment behavior.

Accounting Principles and Definitions

Contra-revenue accounts have balances opposite of traditional revenue accounts.
The allowance method defines how to account for estimated uncollectibles, ensuring financial health assessment.
Trade discounts represent sales below the listed price, impacting reported revenue.

Unique Situations

On December 31, 2021, adjustment entry for Physicians' Hospital resulted in a debit to bad debt expense of $5,950 due to a 15% estimate of uncollectibles.
Terrell & Associates recorded legal services of $9,800 via a note from Whole Grain Bakery, showing revenue recognition practices in services without immediate cash collection.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge of key concepts from Accounting Chapter 5.2. This quiz includes true/false statements and practical scenarios related to the allowance method for uncollectible accounts. Challenge yourself with these flashcards to enhance your understanding of GAAP and financial reporting.