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Questions and Answers
What is the purpose of the service fee charged by the card issuer to the retailer for processing credit card transactions?
What is the purpose of the service fee charged by the card issuer to the retailer for processing credit card transactions?
How is the Bad Debt Expense calculated in the given example for Brule Co.?
How is the Bad Debt Expense calculated in the given example for Brule Co.?
What type of account is the Allowance for Doubtful Accounts classified as?
What type of account is the Allowance for Doubtful Accounts classified as?
When a company uses the Allowance Method for uncollectible accounts, which of the following statements is true?
When a company uses the Allowance Method for uncollectible accounts, which of the following statements is true?
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Which of the following is NOT a reason for companies to issue promissory notes?
Which of the following is NOT a reason for companies to issue promissory notes?
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What is the direct impact of recording a service charge expense in a credit card transaction?
What is the direct impact of recording a service charge expense in a credit card transaction?
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What is a potential consequence of failing to properly estimate Bad Debt Expense?
What is a potential consequence of failing to properly estimate Bad Debt Expense?
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What relationship does a promissory note have from the perspective of the payee?
What relationship does a promissory note have from the perspective of the payee?
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What journal entry should be made when a credit sale of $100 occurs?
What journal entry should be made when a credit sale of $100 occurs?
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What impact does collecting $333 on account have on the financial statements?
What impact does collecting $333 on account have on the financial statements?
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When estimating bad debts for the Allowance Method, which account is debited?
When estimating bad debts for the Allowance Method, which account is debited?
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What is the effect of an adjustment for estimated bad debts of $15?
What is the effect of an adjustment for estimated bad debts of $15?
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What is indicated when the Allowance for Doubtful Accounts balance is $25?
What is indicated when the Allowance for Doubtful Accounts balance is $25?
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Which transaction would likely decrease the balance in Accounts Receivable?
Which transaction would likely decrease the balance in Accounts Receivable?
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In the event of writing off a specific receivable, which account is credited?
In the event of writing off a specific receivable, which account is credited?
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Which method best assists in estimating uncollectible accounts?
Which method best assists in estimating uncollectible accounts?
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What is the purpose of aging accounts receivable?
What is the purpose of aging accounts receivable?
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If the unadjusted trial balance shows an allowance for doubtful accounts of $528, what adjusting entry is necessary if the estimated uncollectible receivables total $2,228?
If the unadjusted trial balance shows an allowance for doubtful accounts of $528, what adjusting entry is necessary if the estimated uncollectible receivables total $2,228?
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What is a primary reason companies sell their receivables?
What is a primary reason companies sell their receivables?
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When a company factors its receivables, what does it typically pay?
When a company factors its receivables, what does it typically pay?
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In a situation where a company sells $600,000 in receivables with a 2% service charge, how much cash will the company receive?
In a situation where a company sells $600,000 in receivables with a 2% service charge, how much cash will the company receive?
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How are credit card sales recorded in accounting?
How are credit card sales recorded in accounting?
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What does the allowance method specifically estimate?
What does the allowance method specifically estimate?
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Which entry reflects the correct accounting for bad debt under the allowance method after estimating uncollectibles?
Which entry reflects the correct accounting for bad debt under the allowance method after estimating uncollectibles?
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Study Notes
Accounting for Receivables
- Companies recognize accounts receivable when goods or services are sold on credit.
- Receivables are classified as accounts receivable, notes receivable, and other receivables.
- Accounts receivable represent amounts due from customers for goods or services sold.
- Notes receivable represent amounts due from customers, with a formal written promise to pay.
- Nontrade receivables include interest, loans to officers, advances to employees, and taxes.
- Companies value receivables based on their cash realizable value.
- Uncollectible receivables are accounted for using the allowance method or the direct write-off method
- The allowance method is preferred for financial reporting
- The direct write-off method is not acceptable under generally accepted accounting principles (GAAP)
Recognizing Accounts Receivable
- Service organizations recognize receivables when they perform a service on account.
- Merchandisers recognize accounts receivable at the point of sale of merchandise on account.
Valuing Accounts Receivable
- Accounts receivable are current assets.
- Valuation is based on cash realizable value, accounting for expected collections.
- Companies use the allowance method to estimate uncollectible receivables, recording a bad debt expense.
- Recording is done by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.
Disposing of Accounts Receivables
- Companies sell receivables to collect cash quickly.
- Factoring is the process of selling receivables to a factor (finance company or bank).
- Credit card sales are recorded as cash sales.
- Retailers pay a fee to the card issuer to process transactions.
Recognizing Notes Receivable
- Companies grant credit in exchange for a promissory note.
- A promissory note is a written promise to pay a specified amount of money.
- Promissory Notes can be used in a few ways such as when individuals and companies lend or borrow money, when transaction amounts exceed normal limits, or in settlement of accounts receivable.
- Promissory notes are used on a variety of transactions.
Valuing Notes Receivable
- Short-term notes receivable are reported at their net realizable value.
- The estimation of cash realizable value and bad debt expense are done similarly for accounts receivable.
- Allowance for Doubtful Accounts is applied.
Disposing of Notes Receivable
- Notes can be held until maturity date.
- Default may lead to adjustments.
- Notes can be sold to speed up the collection process.
Honor and Dishonor of Notes Receivable
- Honor: Maker pays the note in full by the maturity date.
- Dishonor: Maker fails to pay the note in full by the maturity date.
Accrual of Interest Receivable
- If financial statements are prepared before the maturity date, interest revenue is accrued.
- An adjusting entry is created to record the accrued interest revenue and the interest receivable.
Analysis of Receivables
- Accounts receivable turnover is calculated to assess how well a company manages its credit and collection processes.
- The average collection period measures the average number of days it takes to collect on credit sales.
IFRS and GAAP Comparison
- Both follow the same basic principles for recording receivables, recognizing sales returns and allowances, and using the allowance method.
- However, there are some differing approaches to record a factoring transaction under IFRS or GAAP.
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Description
Test your knowledge on accounting for receivables, including classifications such as accounts receivable and notes receivable. This quiz covers key principles and methods used for recognizing and valuing receivables in financial reporting. Evaluate your understanding of the allowance and direct write-off methods.
