Accounting Chapter 8 Key Terms

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Questions and Answers

What is Accounts Receivable?

Interest income on sales

Amounts due for services already provided

Cash payments for goods

Amounts to be received in the future due to the sale of goods or services (correct)

What is Accounts Receivable Turnover?

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

What is aging the receivables?

The process of analyzing the accounts receivable and classifying them according to various age groupings based on due date.

What is Allowance for Doubtful Accounts?

A contra-asset account containing the estimated uncollectible accounts receivable. Signup and view all the answers

What is the allowance method?

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. Signup and view all the answers

What is Bad Debt Expense?

An expense account to record losses from extending credit. Signup and view all the answers

What is the direct write-off method?

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense when they are deemed uncollectible. Signup and view all the answers

What is a dishonored note receivable?

A note that the maker fails to pay on the due date. Signup and view all the answers

What is maturity value?

The amount that is due on the maturity date of a note. Signup and view all the answers

What is net realizable value?

The amount of cash the firm expects to collect. Signup and view all the answers

What are Notes Receivable?

A written promise for amounts to be received. Signup and view all the answers

What is the number of days' sales in receivables?

The relationship between sales and accounts receivable, calculated by dividing net accounts receivable by average daily sales. Signup and view all the answers

What are Receivables?

Amounts due from individuals and companies that are expected to be collected in cash. Signup and view all the answers

What are the three classifications of receivables?

Accounts Receivable, Notes Receivable, Other Receivable. Signup and view all the answers

What method of accounting for uncollectible receivables should Dan's Hardware use and why?

Dan's Hardware should use the direct write-off method because it has a small volume of accounts receivable. Signup and view all the answers

What kind of account is Allowance for Doubtful Accounts?

Contra Asset with a credit balance. Signup and view all the answers

How are Accounts Receivable and Allowance for Doubtful Accounts reported on the balance sheet?

Accounts Receivable is reported at a net amount after subtracting Allowance for Doubtful Accounts. Signup and view all the answers

Give two possible explanations for a large Allowance for Doubtful Accounts balance relative to Accounts Receivable.

<ol> <li>The percentage rate used is excessive; 2. Noncollectible accounts are still being carried in Accounts Receivable.</li> </ol> Signup and view all the answers

Which method of estimating uncollectibles provides the most accurate estimate of net realizable value?

An estimate based on analysis of receivables. Signup and view all the answers

Who is the payee in the note receivable issued by Neptune Company to Sailfish Company?

Sailfish Company. Signup and view all the answers

What is the title of the account used by Sailfish Company in recording the note?

Notes Receivable. Signup and view all the answers

If a note provides for payment of principal of $85,000 and interest at 6%, will the interest amount to $5,100?

False Signup and view all the answers

What accounts should be debited and credited by the payee to record a dishonored note receivable?

Debit Accounts Receivable for $243,600, Credit Notes Receivable for $240,000, and Credit Interest Revenue for $3,600. Signup and view all the answers

What entry should be made to record the receipt of payment for a dishonored note receivable?

Debit Cash for $245,427, Credit Accounts Receivable for $243,600, and Credit Interest Revenue for $1,827. Signup and view all the answers

Study Notes

Accounts Receivable refers to amounts expected to be received from the sale of goods or services.
Accounts Receivable Turnover indicates liquidity, calculated by dividing net credit sales by average net accounts receivable.
Analyzing and classifying accounts receivable based on age is known as aging the receivables, which assists in identifying overdue amounts.
Allowance for Doubtful Accounts acts as a contra-asset account estimating uncollectible receivables.
The allowance method estimates bad debts at the end of each period to account for potential losses.
Bad Debt Expense records losses incurred from extending credit to customers.
The direct write-off method charges Bad Debt Expense when a specific account is deemed uncollectible.
A dishonored note receivable occurs when the maker fails to pay on the due date.
Maturity value is the total amount owed on a note when it reaches its due date.
Net realizable value is the expected cash amount a firm anticipates collecting from accounts receivable.

Notes Receivable and Sales Analysis

Notes Receivable is a written promise for amounts to be received, documented with a formal instrument.
Number of days' sales in receivables reflects the relationship between sales and accounts receivable, assessed by dividing net accounts receivable by average daily sales.
Receivables encompass amounts due from customers, expected to be collected in cash.

Classification and Business Practices

Receivables are classified into three categories: Accounts Receivable, Notes Receivable, and Other Receivables.
For small businesses like Dan's Hardware, which has limited credit extention, the direct write-off method is suited due to fewer receivables to monitor.

Accounting Treatments and Reporting

Allowance for Doubtful Accounts is classified as a contra asset with a normal credit balance.
On a balance sheet, accounts receivable of $673,400 minus an allowance of $11,900 results in a net amount of $661,500, with disclosure required for the allowance.
An excessive allowance balance may result from a high percentage used for estimates or carrying old noncollectable accounts.

Accurate Estimation of Receivables

Estimation based on thorough analysis of receivables yields a more accurate current net realizable value of receivables.

Example Scenarios

In a transaction between Neptune Company and Sailfish Company, Sailfish acts as the payee and records the transaction under Notes Receivable.
For a $85,000 principal note at 6% interest, the interest totals $5,100 only if paid within one year.
A dishonored $240,000 note requires debiting Accounts Receivable for $243,600 and crediting Notes Receivable for $240,000 and Interest Revenue for $3,600.
Payment of a dishonored note including interest results in recording cash received of $245,427, debiting Accounts Receivable, and recognizing $1,827 in Interest Revenue.

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Description

Test your understanding of key accounting terms from Chapter 8. This quiz features essential words such as Accounts Receivable and Accounts Receivable Turnover. Review the definitions and concepts to excel in your accounting studies.