Accounting for Receivables - Chapter 8
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Questions and Answers

What is the net realizable value of accounts receivable?

  • The amount of accounts receivable that is past due.
  • The amount of accounts receivable that is estimated to be collected. (correct)
  • The total amount of accounts receivable.
  • The amount of accounts receivable that is written off.

    • Which of the following is NOT a feature of the allowance method for bad debts?

  • The amount of uncollectible receivables is estimated at the end of the period.
  • Actual uncollectibles are written off against the allowance when it is determined that the specific account is uncollectible.
  • If an account previously written off is recovered, the write-off is reversed and the collection is recorded.
  • The allowance method is used to write off bad debts only when it is certain that the debt will not be collected. (correct)

    • What is the purpose of recording bad debt expense?

  • To reduce the balance of accounts receivable to the net realizable value.
  • To reflect the fact that some receivables will not be collected.
  • To recognize the cost of uncollectible receivables.
  • All of the above. (correct)

    • When is bad debt expense typically recorded?

    <p>At the end of the accounting period. (C)</p> Signup and view all the answers

    What is the difference between the direct write-off method and the allowance method?

    <p>The direct write-off method does not record bad debt expense until the specific account is deemed uncollectible. (A)</p> Signup and view all the answers

    If a customer's account is written off, what happens to the allowance for doubtful accounts?

    <p>It is decreased. (B)</p> Signup and view all the answers

    If a company recovers a previously written-off account, what is the journal entry?

    <p>Debit Cash, Credit Allowance for Doubtful Accounts. (D)</p> Signup and view all the answers

    Which of the following is NOT a method for estimating uncollectible accounts?

    <p>Direct write-off method. (D)</p> Signup and view all the answers

    What is the primary reason for using a promissory note in a business transaction?

    <p>To provide formal documentation for a loan or credit extension. (C)</p> Signup and view all the answers

    What is the maker of a promissory note?

    <p>The party who makes the promise to pay. (C)</p> Signup and view all the answers

    What is the term used when a promissory note is paid in full on its maturity date?

    <p>Honored (C)</p> Signup and view all the answers

    If a promissory note is not paid in full when due, what happens to the balance owed?

    <p>It is transferred to Accounts Receivable. (A)</p> Signup and view all the answers

    How is interest calculated on a promissory note?

    <p>By multiplying the principal amount, interest rate, and time period. (A)</p> Signup and view all the answers

    What is the purpose of a separate interest receivable account?

    <p>To track the interest earned on a note receivable. (A)</p> Signup and view all the answers

    What is the difference between a note receivable and an account receivable?

    <p>A note receivable is a formal written agreement, while an account receivable is an informal agreement. (B)</p> Signup and view all the answers

    What is the contra asset account that is used to record estimated uncollectible accounts?

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

    When an account is written off as uncollectible, which of the following accounts is debited?

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

    What is the purpose of the percentage receivables approach to estimating uncollectible accounts?

    <p>To determine the net realizable value of accounts receivable. (D)</p> Signup and view all the answers

    When does a company record bad debts expense under the percentage receivables approach?

    <p>At the end of the accounting period. (B)</p> Signup and view all the answers

    What is the effect on net income when a company writes off an uncollectible account?

    <p>Net income remains unchanged. (A)</p> Signup and view all the answers

    What is the effect on the net realizable value of accounts receivable when a company writes off an uncollectible account?

    <p>The net realizable value remains unchanged. (D)</p> Signup and view all the answers

    What is the difference between the percentage receivables approach and the aging of receivables approach?

    <p>The percentage receivables approach is used to estimate uncollectible accounts for the entire accounts receivable balance, while the aging of receivables approach is used to estimate uncollectible accounts for individual accounts. (A)</p> Signup and view all the answers

    What does it mean for the Allowance for Doubtful Accounts to have a debit balance?

    <p>The company has written off more accounts than they have estimated to be uncollectible. (B)</p> Signup and view all the answers

    Study Notes

    Chapter 8: Accounting for Receivables

    • This chapter covers accounting for accounts receivable, including doubtful accounts, write-offs, and recoveries. It also explains accounting procedures for notes receivable.

    Case Study

    • A case study, located on page 336, focuses on collecting payments from clients who are difficult to contact.

    Learning Goals

    • Students will learn to record transactions related to accounts receivable.
    • This includes transactions related to doubtful accounts, write-offs, and recoveries.
    • Students will also learn accounting procedures for notes receivable.

    Accounting for Receivables

    • Accounts Receivable:

      • Recognition and valuation

    • Notes Receivable:

      • Recognition and disposition

    • Statement Presentation:

      • Presentation
      • Analysis: Cash receipts from receivables
      • Accelerating cash receipts from receivables

    Brief Exercises (BE8-1)

    • This exercise uses seven financial transactions to demonstrate how accounting entries affect accounts receivable, notes receivable, total assets, total liabilities, and owner's equity.

    Chapter 8: Success Criteria

    • Calculate the net realizable value of accounts receivable and account for bad debts.
    • Account for notes receivable.

    Valuing Accounts Receivable

    • Some receivables become uncollectible.
    • Uncollectible receivables are not reported as assets if there is no future benefit (net realizable value).
    • Receivables are written down to reflect the collectible amount. This is done by recording bad debt expense during the period related revenues are recorded.

    The Allowance Method

    • Estimate uncollectible receivables and record them at the end of the period.
    • Actual uncollectibles are written off against the allowance.
    • Write-offs are reversed and collections are recorded if a previously written-off account is recovered.

    Allowance for Doubtful Accounts

    • Deducted from accounts receivable on the balance sheet.
    • Net realizable value = Accounts Receivable − Allowance for Doubtful Accounts.

    Estimating the Allowance: Percentage Receivables Approach

    • Calculates the percentage of receivables estimated to be uncollectible.
    • Based on past experience and credit policies.
    • Can be applied to total receivables balance or grouped by age (aging schedule is required).
    • Used to estimate net realizable value; this method is also known as the balance sheet method.

    Teaching the Class

    • Column 1: Focuses on unadjusted credit balance in the allowance account. Complete exercises BE8-6 a), BE8-7 a) and c).
    • Column 2: Focuses on unadjusted debit balance in the allowance account. Complete exercises BE8-6 b), BE8-7 a) and b).
    • Column 3: Analyses write-offs and subsequent recoveries related to net income and net realizable value of accounts receivable. Complete exercises BE8-9 and BE8-10.

    Additional Exercises (BAT4M)

    • Exercises E8-4, E8-7, and P8-3 are also referenced.

    Recording Estimated Uncollectibles

    • Debits bad debts expense and credits allowance for doubtful accounts.

    Recording Write-Off of Uncollectible Accounts

    • The amount written-off is debited to the allowance and the expense is not increased. The expense was previously recognized when the allowance was initially recorded.

    Recovery of an Uncollectible Account

    • Reverse the original write-off.
    • Record the collection as usual.

    Notes Receivable

    • Credit may be granted in exchange for a promissory note.
    • A promissory note is a written promise for payment. It can be for payment on demand or at a definite time.
    • Notes receivable can come from financing a purchase, lending money, or extending the account receivable beyond the normal due date and may include interest in the terms.
    • The party promising payment is the maker, and the recipient is the payee.

    Recording Interest

    • Interest is calculated based on the principal amount, annual interest rate, and the fraction of a year.
    • Usually, separate interest receivable accounts are used to record interest.

    Recognizing Notes Receivable

    • A note can be received to pay an outstanding account receivable.
    • If received for cash, credit is to Cash.
    • Notes are valued at net realizable value.

    Disposing of Notes Receivable

    • A note is honored when paid in full at its maturity date. Amount due is equal to principal + interest.
    • Note is dishonored when not paid in full at maturity. Balance transferred to Accounts Receivable.

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    Related Documents

    Chapter 8 Principles of Financial Accounting PDF

    Description

    This quiz explores Chapter 8 on accounting for receivables, focusing on accounts receivable, doubtful accounts, and notes receivable. Students will demonstrate their understanding of recording transactions related to receivables and analyze cash receipt procedures. Engage with case studies and exercises to solidify your knowledge.

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