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Accounting for Notes and Receivables
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Accounting for Notes and Receivables

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Questions and Answers

What is the present value of the interest for a note with an annual interest of €1,000 over three years at 10%?

  • €2,487 (correct)
  • €3,300
  • €3,000
  • €2,000

    • If the principal of a zero-interest-bearing note is $10,000 and the market interest rate is 9%, what is the present value of the principal?

  • €8,000
  • €9,174
  • €6,100
  • €7,513 (correct)

    • How is the receipt of a zero-interest-bearing note recorded in Jeremiah Company's books?

  • Notes Receivable €10,000; Cash €10,000 (correct)
  • Cash €10,000; Notes Receivable €10,000
  • Notes Receivable €10,000; Interest Revenue €10,000
  • Cash €9,500; Notes Receivable €10,000

    • What is the total current market value of the note at face value in the provided illustration?

    <p>€10,000</p> Signup and view all the answers

    What entry would be made for the interest revenue received at the end of the first year?

    <p>Interest Revenue €1,000; Cash €1,000</p> Signup and view all the answers

    What is the correct journal entry for Bad Debt Expense when the Allowance for Doubtful Accounts has a credit balance of €800?

    <p>Bad Debt Expense €25,810, Allowance for Doubtful Accounts €25,810</p> Signup and view all the answers

    When estimating bad debts at 5% of accounts receivable, what amount is recorded for Bad Debt Expense if accounts receivable total €100,000?

    <p>€5,000</p> Signup and view all the answers

    What adjustment is made to the Bad Debt Expense if the Allowance for Doubtful Accounts has a $1,500 debit balance?

    <p>Increase Bad Debt Expense by $4,500</p> Signup and view all the answers

    If Duncan Company estimates bad debts at 5% and has a previous balance of €2,000 in the Allowance for Doubtful Accounts, how much should the Bad Debt Expense entry be?

    <p>€3,000</p> Signup and view all the answers

    What is the overall effect on the Allowance for Doubtful Accounts when an adjustment is made for Bad Debt Expense of €25,810 with an initial credit balance of €800?

    <p>Increase to €26,610</p> Signup and view all the answers

    In which scenario would Bad Debt Expense not be recorded?

    <p>If no accounts receivable are present</p> Signup and view all the answers

    How should the journal entries for Bad Debt Expense be classified in the accounting records?

    <p>Expenses</p> Signup and view all the answers

    Which of the following best describes the purpose of the Allowance for Doubtful Accounts?

    <p>To estimate future bad debts</p> Signup and view all the answers

    What is the purpose of disclosing fair value of receivables?

    <p>To allow for comparison with its carrying amount</p> Signup and view all the answers

    Which statement best describes the accounts receivable turnover ratio?

    <p>It measures the average number of times receivables are collected in a period</p> Signup and view all the answers

    Which of the following is a key aspect of managing cash transactions?

    <p>Establishing proper controls to prevent unauthorized transactions</p> Signup and view all the answers

    What is indicated by the concentration of credit risk in receivables?

    <p>The likelihood of default by one or several major customers</p> Signup and view all the answers

    What does the imprest petty cash system manage?

    <p>Small amounts for miscellaneous expenses</p> Signup and view all the answers

    Which type of bank account is often used to enhance cash controls?

    <p>Lockbox accounts</p> Signup and view all the answers

    What is measured by the liquidity of receivables?

    <p>The ability to convert assets into cash quickly</p> Signup and view all the answers

    What should be appropriately offset for impaired receivables?

    <p>Valuation accounts</p> Signup and view all the answers

    What type of account is affected by the adjustment for estimated bad debts?

    <p>Bad Debt Expense</p> Signup and view all the answers

    After collecting $333 on account, what is the impact on Accounts Receivable?

    <p>It decreases by $333</p> Signup and view all the answers

    What does the Allowance for Doubtful Accounts do in accounting?

    <p>Estimates future uncollectible accounts</p> Signup and view all the answers

    How much did the company estimate as an adjustment for bad debts on July 29?

    <p>$15</p> Signup and view all the answers

    What is the effect on Allowance for Doubtful Accounts after writing off uncollectible accounts for $10?

    <p>It decreases by $10</p> Signup and view all the answers

    What is the balance of Accounts Receivable at the end after collecting $333 and adjusting for bad debts?

    <p>$267</p> Signup and view all the answers

    What was the beginning balance for Allowance for Doubtful Accounts?

    <p>$25</p> Signup and view all the answers

    If an adjustment for bad debts is made, what account is credited?

    <p>Allowance for Doubtful Accounts</p> Signup and view all the answers

    What is the ending balance of Accounts Receivable after writing off uncollectible accounts of $10?

    <p>$267</p> Signup and view all the answers

    What is the net value of Accounts Receivable reported on the statement of financial position?

    <p>$227</p> Signup and view all the answers

    Which method of accounting for uncollectible accounts estimates losses based on a percentage of sales?

    <p>Allowance Method</p> Signup and view all the answers

    Why is the Direct Write-Off Method considered theoretically deficient?

    <p>It does not accurately match expenses to the period incurred.</p> Signup and view all the answers

    How is the balance in the Allowance for Doubtful Accounts adjusted?

    <p>By estimating future uncollectible accounts.</p> Signup and view all the answers

    Which of the following is NOT a reason for maintaining an Allowance for Doubtful Accounts?

    <p>To record actual losses incurred.</p> Signup and view all the answers

    What is reflected as a credit loss in the Allowance Method?

    <p>Bad Debt Expense</p> Signup and view all the answers

    According to accounting principles, which method becomes necessary when bad debts are material?

    <p>Allowance Method</p> Signup and view all the answers

    Study Notes

    Notes Issued at Face Value

    • A note issued at face value has a par value of $10,000.
    • The interest is calculated by multiplying the principal by the interest % (10%) for 3 years.
    • The present value of the interest is $2,487.
    • The present value of the note's principal is $7,513.
    • The present value of the note is $10,000.
    • The journal entry for the note is a debit to Notes Receivable and a credit to Cash for the amount of the note.
    • The journal entry for the interest received is a debit to Cash and a credit to Interest Revenue for the amount of interest earned.

    Zero-Interest-Bearing Notes

    • Jeremiah Company receives a zero-interest-bearing note for $10,000.
    • The note has a market rate of 9% interest.
    • Jeremiah records the receipt of the note by debiting Notes Receivable and crediting Cash for the amount of the note.

    Allowance for Doubtful Accounts

    • To ensure proper accounting, there are specific accounting methods for uncollectible accounts receivable.
    • The direct write- off method is theoretically deficient because it doesn't record expenses as incurred and the receivable is not stated at cash realizable value.
    • Under the allowance method, losses are estimated, using two primary approaches: "percentage-of-sales" and "percentage-of-receivables."
    • There is a journal entry for the amount of estimated bad debts recorded; debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.

    Analysis of Receivables

    • The accounts receivable turnover ratio is used to measure how many times, on average , a company collects its receivables during a given period.

    Cash Controls

    • Companies use various techniques to control cash transactions including using bank accounts, lockbox systems, petty cash, and imprest bank accounts.

    Using Bank Accounts

    • Businesses can vary the type, number, and location of bank accounts to better meet their control objectives.
    • This might include establishing a general checking account, collection float, lockbox accounts, and imprest bank accounts.

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    Related Documents

    Cash and Receivables PDF

    Description

    This quiz covers accounting concepts related to notes issued at face value, zero-interest-bearing notes, and the allowance for doubtful accounts. It examines how to record these transactions in journals and the financial implications of different types of notes. Test your understanding of these essential accounting principles.

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