24 Questions
What is the total amount of cash and notes receivable collected in the journal entry?
10,800
What is the interest revenue earned from the notes receivable?
400
What does the receivables turnover ratio measure?
Number of times during a year the average accounts receivable balance is collected
What is the formula for calculating the receivables turnover ratio?
Net credit sales / Average accounts receivable
What does the average collection period measure?
The number of days the average accounts receivable balance is outstanding
What is the purpose of estimating uncollectible accounts?
To match the expense of uncollectible accounts with the revenue earned from sales
What is the primary reason companies are required to estimate future uncollectible accounts?
To comply with accounting standards
What is the result of recording an estimate of uncollectible accounts?
Assets decrease, expenses increase
What is the basis of the estimate of bad debts in the percentage-of-receivables method?
Balance sheet amount—accounts receivable
What is another name for the percentage-of-receivables method?
Balance sheet method
What is the purpose of estimating uncollectible accounts?
To match bad debt expense with revenue
Which of the following methods is used to estimate uncollectible accounts?
Both A and B
What is the effect of estimating uncollectible accounts on the financial statements?
Assets decrease, net income decreases
What is the primary goal of estimating uncollectible accounts?
To provide accurate financial reporting
What is a characteristic of the aging method?
Considers the age of receivables
Based on the illustration, what is the estimated percentage of uncollectible accounts for receivables that are 61-120 days past due?
30%
What is the total amount of estimated uncollectible accounts for Kimzey's accounts receivable?
$7,000,000
The percentage-of-receivables method is also known as the:
Allowance method
What is the basis for estimating uncollectible accounts using the aging method?
The age of the receivables
What is the advantage of the aging method over the percentage-of-receivables method?
It is more accurate
According to the illustration, what is the total amount of Kimzey's accounts receivable?
$30,000,000
What is the percentage of uncollectible accounts for receivables that are not yet due?
10%
What is the estimated amount of uncollectible accounts for receivables that are more than 120 days past due?
$700,000
The aging method is used to estimate:
The amount of uncollectible accounts
Study Notes
Accounts Receivable and Bad Debts
- Companies must estimate future uncollectible accounts and record estimates in the current year.
- Estimated uncollectible accounts reduce assets (accounts receivable) and increase expenses (bad debt expense).
Estimating Uncollectible Accounts
- Two methods can be used: percentage-of-receivables method and aging method.
- Percentage-of-receivables method bases the estimate of bad debts on the balance sheet amount (accounts receivable).
- Aging method considers the age of receivables, with older accounts being more likely uncollectible.
Allowance for Uncollectible Accounts
- The allowance is estimated based on the balance sheet amount or the age of receivables.
- The estimated amount is then used to reduce assets (accounts receivable) and increase expenses (bad debt expense).
Receivables Analysis
- Receivables Turnover Ratio: the number of times during a year the average accounts receivable balance is collected.
- Average Collection Period: the number of days the average accounts receivable balance is outstanding.
Learn about estimating bad debts in accounting, including the percentage-of-receivables and aging methods. Understand how to record estimates and their impact on assets and expenses.
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